an analysis of u.s. chicken exports to china li zhang …
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AN ANALYSIS OF U.S. CHICKEN EXPORTS TO CHINA
by
LI ZHANG
(Under the direction of Dr. Lewell F. Gunter)
ABSTRACT
The United States is the world’s largest poultry producer and exporter. Hong Kong/China has been the second largest market for U.S. poultry products in recent years. The growth potential for chicken exports to this market is great, given China’s large population, relatively low per capita consumption of chicken, expected rising incomes, and the recent inclusion of China in the WTO. In this study, we examined the exports of different frozen chicken parts from the U.S. to Hong Kong/China. Excess supply and demand equations were estimated using three stage least squares, and elasticities were calculated. The results indicate that there may be some differences in income elasticities and price flexibility coefficients of different parts, and suggests that the U.S. may treat Hong Kong/China as a residual market for lower valued parts.
INDEX WORDS: Poultry, Chicken parts, Exports, U.S., Hong Kong, China, Excess
supply, Excess demand, International trade.
AN ANALYSIS OF U.S. CHICKEN EXPORTS TO CHINA
by
LI ZHANG
B.Ec., Yangzhou University, P.R. China, 1996
A Thesis Submitted to the Graduate Faculty of The University of Georgia in Partial
Fulfillment of the Requirements for the Degree
MASTER OF SCIENCE
ATHENS, GEORGIA
2002
© 2002
Li Zhang
All Right Reserved.
AN ANALYSIS OF U.S. CHICKEN EXPORTS TO CHINA
by
LI ZHANG
Major Professor: Lewell F. Gunter Committee: Jack E. Houston Chung L. Huang
Electronic Version Approved:
Gordhan L. Patel Dean of the Graduate School The University of Georgia December 2002
iv
Dedicated to My Parents and My Husband
For Their Love and Support
v
ACKNKOWLEGDMENTS
My deepest and sincere thanks go to Dr. Lewell F. Gunter, my major professor,
for his invaluable guidance and generous encouragement throughout my study. I would
like to express my appreciation to my committee members, Dr. Jack E. Houston and Dr.
Chung L. Huang, for sharing their knowledge, giving me advice and support. I owe
further thanks to Dr. James E. Epperson, for keeping me on track during my thesis
writing.
I am especially indebted to the University of Georgia, and more so to the
Department of Agricultural and Applied Economics for giving me the chance receiving
the professional education and training, and offering me a broader perspective. I wish to
thank my fellow students for encouraging, supporting, and helping me going through
difficult times.
Last, but not least, my deepest gratitude and love goes to my parents and my
husband for their unconditional and unwavering support. Without their support, I don’t
know what I would have accomplished.
vi
TABLE OF CONTENTS
Page
ACKNOWLEDGMENTS ...................................................................................................v
LIST OF TABLES............................................................................................................. vi
LIST OF FIGURES .......................................................................................................... vii
CHAPTER
1 INTRODUCTION ..............................................................................................1
Background Information................................................................................1
Problem Statement .........................................................................................4
Objectives ......................................................................................................5
Organization...................................................................................................6
2 THE INTERNATIONAL MARKET FOR CHICKEN AND U.S. CHICKEN
EXPORTS TO HONG KONG/CHINA...............................................................................7
World Poultry Production, Consumption, and Trade ...................................7
U.S. Poultry Production and Exports..........................................................10
Hong Kong/China Poultry Production and Consumption ..........................24
Hong Kong/China Poultry Imports.............................................................31
3 RELATED LITERATURE...............................................................................42
China Poultry Production Issues..................................................................42
China Poultry Consumption and Marketing Issues .....................................45
Poultry Trade Issues.....................................................................................48
vii
Trade Policy Issues ......................................................................................52
Hong Kong-Mainland China Transshipment Issues ....................................55
China Data Problem.....................................................................................57
4 AN ECONOMETRIC MODEL OF U.S. CHICKEN EXPORTS TO HONG
KONG/CHINA ..................................................................................................................59
Theoretical Framework................................................................................59
Empirical Model ..........................................................................................63
Econometric Consideration..........................................................................67
Hypotheses...................................................................................................78
5 ESTIMATED MODELS, DATA, AND RESULTS ........................................80
Estimated Models.........................................................................................80
Data ..............................................................................................................90
Results..........................................................................................................91
6 SUMMARY AND CONCLUSION ...............................................................111
Study Summary..........................................................................................111
Conclusion .................................................................................................113
Limitations and Future Research ...............................................................114
REFERENCES ................................................................................................................116
viii
LIST OF TABLES
Page
Table 2.1: Hong Kong Per Capita Consumption Between Fresh and Chilled/Frozen
Chicken ............................................................................................................26
Table 2.2: Volume and Value of Chicken Meat Imports to Hong Kong,
January-November...........................................................................................32
Table 2.3: Hong Kong Imports of Chicken Products ........................................................34
Table 2.4: Percentage of U.S. Chicken Products Imported to Hong Kong being
Re-Exported to China, January-November......................................................38
Table 5.1: Variable Definitions..........................................................................................89
Table 5.2: Estimation Results for U.S. Chicken Feet Exports to HK/CH .........................93
Table 5.3: Estimation Results for U.S. Chicken Wing Exports to HK/CH .......................94
Table 5.4: Estimation Results for U.S. Chicken Leg Exports to HK/CH..........................95
Table 5.5: Estimation Results for U.S. Chicken Offal Exports to HK/CH........................96
Table 5.6: Estimated Elasticities for Chicken Feet Excess Supply and Demand ............104
Table 5.7: Estimated Elasticities for Chicken Wings Excess Supply and Demand.........104
Table 5.8: Estimated Elasticities for Chicken Legs Excess Supply and Demand ...........105
Table 5.9: Estimated Elasticities for Chicken Offal Excess Supply and Demand...........105
ix
LIST OF FIGURES
Page
Figure 2.1: World Broiler Production/Exports ....................................................................9
Figure 2.2: Market Share of Top Five Broiler Export Countries.......................................10
Figure 2.3: U.S. Broiler Production by State .....................................................................12
Figure 2.4: U.S. Chicken and Turkey Exports...................................................................13
Figure 2.5: U.S. Poultry and Products Exports by State....................................................15
Figure 2.6: U.S. Chicken Meat Exports (1997-2002 Total) ..............................................16
Figure 2.7: U.S. Frozen Chicken Parts Exports (1997-2002 Total)...................................18
Figure 2.8: U.S. Frozen Chicken Parts Exports to Hong Kong/China ..............................20
Figure 2.9: Prices of U.S. Frozen Chicken Parts Exports to Hong Kong/China ...............22
Figure 4.1: The Excess Demand of X................................................................................60
Figure 4.2: Supply and Demand Curves of One Product Between Two Trading
Countries ..........................................................................................................61
Figure 4.3: Supply and Demand Curves of One Product Among Three Trading
Countries ..........................................................................................................63
1
CHAPTER 1
INTRODUCTION
1. Background Information
1.1. World Poultry Production, Consumption, and Trade
In the past decade, poultry production has led the growth in global livestock
production, with poultry accounting for nearly 50 percent of meat production gains. As
poultry production units have become more integrated, concentrated, and better managed,
poultry production costs have fallen more than those of competing meats, such as, beef
and pork (USDA, 2002a).
Poultry meat consumption growth has been especially strong in China, Russia,
and Mexico in recent years. Even in the U.S., consumers are buying more poultry. As a
result of the strong and growing world demand for poultry meat, global poultry exports
have advanced at a double-digit pace in the 1990s(Greene and Southand, 1998). World
poultry imports are dominated by two major markets, Russia and Hong Kong/China. In
the recent years, these two markets account for approximately 65 percent of world
imports. Meanwhile, the export side of global poultry trade is driven mainly by the
United States, Brazil, the EU and China (USDA, 1997a).
2
1.2. U.S. Chicken Production and Exports
The U.S. poultry industry is the world’s largest producer and exporter of poultry
meat. U.S. broiler production is concentrated in a group of States: Georgia, Arkansas,
North Carolina, Alabama, and Mississippi. In 2001, these States accounted for over 67
percent of broilers produced in the United States.
U.S. poultry exports are primarily chicken and turkey exports, with chicken
exports being 10 times as large as the volume of turkey exports. During the 1990s,
exports were a major component of the U.S. broiler industry. In 2001, U.S. broiler
exports totaled 5.6 billion pounds (18 percent of total production), valued at $1.8 billion.
The major U.S. markets are Russia and Hong Kong/China. The smaller markets
include Korea, Japan, Canada and Mexico. With about 16 percent of total poultry
production being exported, the U.S. poultry industry is heavily influenced by currency
fluctuations, trade negotiations, and economic growth in its major importing markets.
From 1997 to 2001, the total value of U.S. frozen chicken parts exports to Russia
was $2.2 billion, and $1.72 billion to Hong Kong/China. In the year 2001, the largest two
importers, Russia and China (including Hong Kong), accounted for 59 percent of total
shipments of U.S. broiler products, on a quantity basis.
As markets have opened to increased poultry trade, the United States has
benefited by selling chicken breasts in the domestic market and exporting dark meat and
less valuable cuts to other markets where they are preferred over breast meat.
3
1.3. China/Hong Kong Poultry Production, Consumption and Transshipment
China is among the world’s largest producers and consumers of animal proteins.
As the world’s second largest poultry producer, China shows production increases of
about 3 percent annually. Poultry imports are increasing even more rapidly to meet the
growing domestic demand for protein. China/Hong Kong is the world’s second-largest
poultry meat importer (USDA, 2000a).
The United States is the largest poultry supplier to Hong Kong/China, because of
its abundant supplies and a big variety of product grades. U.S. broiler parts are extremely
competitive in China, accounting for over 60 percent of total imports. Popular U.S. cuts
include drumsticks, chicken feet, mid-joint wings and whole legs. In 2000, The U.S.
remained the leading supplier of poultry products to the Hong Kong market with a market
share of 65 percent, which was far ahead of the second supplier, Brazil (12 percent).
Consumption of poultry products in Hong Kong/China is primarily chicken. For
the past decade, Chinese poultry meat consumption has grown at a double-digit pace.
China promises to be an important and growing market for poultry meat in the future. A
population 10 times as large as Russia, an expanding middle class, and relative low per
capita consumption levels suggest that consumption will continue to grow. The rapid
growth of the fast-food sector, shift in consumer preferences away from pork towards
poultry, and the booming of supermarkets and hypermarkets, will accelerate the growth
of chicken meat demand (USDA, 1998a).
Less than a third of China’s poultry meat imports are direct, with the rest
transshipped through Hong Kong. Hong Kong is a free port and does not levy any
customs tariff on imports, and there is also no tariff quota or surcharge (USDA, 1997b).
4
Brazil is the second largest poultry supplier to Hong Kong/China. Brazil is very
strong in the supply of its 3-joint wings and whole birds. Among the various cuts of
Brazilian poultry exported to Hong Kong, chicken wings were the biggest category.
China became a member of the World Trade Organization (WTO) in December
2001. China’s accession to the WTO will mean a lowering of the poultry import duty
from 20 percent to 10 percent and a more transparent import regime which should also
stimulate imports.
2. Problem Statement
Hong Kong/China (HK/CH) is definitely a big and promising market for U.S.
chicken product. It is also a complex market.
First, the chicken products exported to HK/CH are composed of various chicken
parts, which reflect different consumption preferences between the U.S. and HK/CH.
Some of the chicken parts preferred in HK/CH are less popular in the U.S., thus, trading
between these two countries has benefited both U.S. producers and Chinese consumers,
and the trend is expected to continue. This characteristic of the U.S.-HK/CH poultry trade
has attracted attention from some researchers; however, no econometric study has been
done to examine this phenomenon.
Secondly, in the United States International Trade Commission (USITC) trading
data which we employed in this study, Hong Kong and China were treated as two
markets, and volume and value of chicken exports were recorded monthly. However,
most of Hong Kong’s imports were transshipped to Mainland China, and the volume of
the transshipment is unknown. Without the transshipment data, any study trying to
5
interpret the Hong Kong market and Mainland China market individually would be very
difficult. In this study, we treat them as one market, and use the notation “Hong
Kong/China” (HK/CH) to represent this market hereafter.
Moreover, with its accession to the WTO, China is expected to further lower their
tariff on poultry products, and increase their imports of U.S. poultry. A study that can
help U.S. poultry producers learn more about the China market, and prepare for a more
open market would be very helpful.
As mentioned above, Hong Kong/China is a promising and unique market for
U.S. chicken meat exports, but little systematic research has been done in this area. In the
next section, we will discuss the objectives of this study.
3. Objectives
The major objectives of this study are to examine the HK/CH market for U.S.
chicken products and to model the excess supply and excess demand of U.S. chicken
exported to HK/CH. The specific objectives of this study are:
• To describe the U.S.- HK/CH chicken export market, explore the different
consumption preferences between the U.S. and HK/CH, and assess the potential
of HK/CH market.
• To estimate excess supply and demand equations for different U.S. chicken parts.
• To estimate the elasticities of the HK/CH demand for U.S. chicken parts and to
draw implications based on the estimated results.
6
4. Organization
The remainder of the thesis is divided into five chapters. Chapter 2 describes the
international market for chicken and U.S. chicken exports to HK/CH. Chapter 3 reviews
related literature in the area of China poultry market, trade policy, and transshipment
issues. Chapter 4 presents the theoretical framework and empirical model used in this
study, including general trading theory and econometric considerations. Chapter 5
introduces the estimated models, data description, and the estimation results of the
models. The final chapter, chapter 6, summarizes the study, presents the conclusions,
points out limitations of the study, and gives suggestion for future research.
7
CHAPTER 2
THE INTERNATIONAL MARKET FOR CHICKEN
AND U.S. CHICKEN EXPORTS TO HONG KONG/CHINA
1. World Poultry Production, Consumption, and Trade
In the past decade, growth in global livestock production has been led by the
poultry sector, with poultry contributing nearly 50 percent of meat production. Global
poultry meat production surpassed beef in 1995, and the gap has continued to widen as
beef production has remained stagnant (USDA, 2002a).
Poultry production units have become more integrated, concentrated, and better
managed, allowing poultry meat to be produced at a lower cost than competing meats.
Strong demand for poultry meat and rising product prices, combined with stable input
costs for poultry producers in many countries, pushed up global poultry output 3 percent
in 2001 to 69.4 million MT. With increased output of poultry compensating for
constrained production of beef and pork in 2001, global meat production grew by one
percent to 237.1 million MT.
Global poultry production rose six-fold between 1965 and 2000 to over 65 million
tons. Consumption increases have exceeded population growth, with world per capita
supplies of poultry meat tripling from 3.3 kg in 1965 to more 10 kg in 2000. International
trade has more than kept pace with this industry growth. Global exports of poultry meat
rose from 375,000 tons in 1965 to over 6.5 million tons in 2000. Thus, trade now
accounts for about 10 percent of global consumption (Peterson and Orden, 2002).
8
Poultry meat consumption growth has been especially strong in China, Russia,
and Mexico in recent years. Even in a developed market such as the U.S., consumers are
buying more poultry. Lower prices relative to red meats, the convenience of processed
poultry products, and promotions of poultry products in the fast-food industry have all
contributed to this trend. As a result of the strong and growing world demand for poultry
meat, global poultry exports have advanced at a double-digit pace in the 1990s, while
pork exports have increased at only about 3 percent annually, and beef exports have
actually declined.
Several important events have also shaped demand for poultry trade over the past
years. Animal disease outbreaks shifted consumption and trade demand away from beef
to pork and poultry. In 2001, consumer preferences for poultry prompted global poultry
trade to increase 4 percent in to 7.6 million metric tons, pushing up poultry’s share of
global meat trade to 43 percent, up from 25 percent in 1990. Beef consumption in
2001was estimated 2.6 percent lower while beef production dropped 1 percent and global
trade slid 5 percent.
The U.S. poultry industry is the world’s largest producer and exporter of poultry
meat. Figure 2.1 shows the broiler production and exports of the top four countries: the
United States, EU, Brazil, and China. In 2000, the U.S. exported 2.446 million MT
broilers, and EU, Brazil and China exported 0.764, 0.916, and 0.464 million MT,
respectively. Hong Kong is one of the biggest exports markets for both the U.S. and
Brazil. The largest export destinations for EU broilers are Russia and the Middle East.
9
0
2000
4000
6000
8000
10000
12000
14000
16000
Production Exports Production Exports Production Exports Production Exports
United States EU Brazil China
Country
Qua
ntity
(1,0
00 M
atric
Ton
s)
1997199819992000
Figure 2.1. World Broiler Production/Exports
Source: “Livestock and Poultry: World Markets and Trade.” Foreign Agricultural Service, USDA (March 2002): 24.
As can be seen from Figure 2.2, in the year 2000, the U.S. supplied about 47
percent of global broiler imports, followed by Brazil, EU, and China, with the market
shares of 17.6 percent, 14.7 percent and 8.9 percent, respectively. U.S.’s share in broiler
exports decreased from 49.36 percent in 1997 to 47.11 percent in 2000, while Brazilian
share increased from 15.49 percent in 1997 to 17.64 percent in 2000.
10
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1997 1998 1999 2000
Year
Prop
ortio
n in
Exp
orts
Qua
ntity
ThailandChina, (PRC)BrazilEuropean UnionUnited States
Figure 2.2. Market Shares of Top Five Broiler Export Countries
Source: “Livestock and Poultry: World Markets and Trade.” Foreign Agricultural Service, USDA (March 2002): 24.
2. U.S. Poultry Production and Exports
As the world’s largest producer and exporter of poultry meat, U.S. consumption
of poultry meat (broilers, other chicken, and turkey) is considerably higher than either
beef or pork, but less than total red meat consumption. With about 16 percent of total
poultry production being exported, the U.S. poultry industry is heavily influenced by
currency fluctuations, trade negotiations, and economic growth in its major importing
markets.
11
2.1. U.S. Broiler Production
Endowed with a favorable climate, state-of-art production technology, low feed
costs, and advantageous market structures, the U.S. poultry industry is among the most
efficient in the world. In 2001, U.S. poultry meat production valued $19.53 billion, of
which 85.5 percent was broiler meat, 14.3 percent was turkey meat, and 0.2 percent was
other chicken meat. The total farm value of U.S. poultry production in 2001 was $23.97
billion. Broiler production accounts for the majority of the value at $16.69 billion,
followed by eggs at $4.44 billion, turkey at $2.79 billion, and other chicken at $46
million.
Broiler production is concentrated in a group of States stretching from North
Carolina, south along the Atlantic coast to Georgia, then westward through Alabama,
Mississippi, and Arkansas. In 2001, these top five broiler-producing States accounted for
over 67 percent of broilers produced in the United States. As shown in Figure 2.3,
Georgia is the largest broiler production state. In 2001, Georgia’s broiler production was
valued at $ 2.432 billion, with $ 2.237 billion, $ 2.004 billion, $ 1.681 billion, and $
1.492 billion for Arkansas, Alabama, North Carolina, and Mississippi, respectively.
12
0
500
1000
1500
2000
2500
3000
Alabama Arkansas Georgia Mississippi North Carolina
State
Valu
e (m
illio
n do
llars
)
19971998199920002001
Figure 2.3. U.S. Broiler Production by State Source: “Poultry - Production and Value.” National Agricultural Statistics Service, USDA, various issues, (1997-2002). Note: In the above figure, annual values cover the 12-month period Dec. 1, previous year through Nov. 30.
2.2. U.S. Poultry Exports
World trade in meats has grown rapidly since the mid 1980s. In the last 17 years,
U.S. exports of the three major meats—beef, pork, and poultry meat—have grown faster
than other countries’ meat exports, and on a value basis, the U.S. has evolved from
primarily a meat importer to a large exporter of the three major meats, with the export
value of each exceeding $1 billion. During the 1990s, exports were a major component
of the U.S. broiler industry. Between 1993 and 1997, U.S. poultry production expanded
rapidly, largely due to a boom in exports. During this period, exports more than doubled,
averaging about 26 percent annual growth, compared with a 5 percent growth in annual
13
production. About 17 percent of U.S. production was exported in 1997, compared with
only 8 percent in 1993. Since 1997, U.S. meat exports have increased at an average rate
of only about 3 percent, in contrast to double-digits of the previous 10 years.
U.S. poultry exports consist primarily chicken and turkey, with chicken exports
being 10 times as large as the volume of turkey exports. Figure 2.4 compares the two
components of U.S. poultry exports. In 2000, chicken and turkey exports were 2.446 and
0.202 million MT, respectively. Chicken exports increased from 2.116 million MT in
1997 to 2.446 million MT in 2000, while turkey exports decreased from 0.275 million
MT to 0.202 million MT.
0
500
1000
1500
2000
2500
3000
1997 1998 1999 2000
Year
Expo
rts
(1,0
00 M
etric
Ton
s)
Chicken Turkey
Figure 2.4. U.S. Chicken and Turkey Exports Source: “Livestock and Poultry: World Markets and Trade.” Foreign Agricultural Service, USDA (March 2002): 24.
14
In 2001, U.S. broiler exports totaled 5.6 billion pounds (18 percent of total
production), valued at $1.8 billion. World demand for U.S. broiler products has
fluctuated over the last several years due to changing economic conditions and currency
exchange rates in the major importing countries. In 2001, the largest importers of U.S.
broiler products were Russia (including the Baltic countries) and China (including Hong
Kong). Together, these two markets accounted for 59 percent of total shipments of U.S.
broiler products, on a quantity basis.
As markets have opened to increased poultry trade, the United States has
benefited by selling chicken breasts in the domestic market and exporting dark meat and
less valuable cuts to other markets where they are preferred over breast meat. This
strategy has been especially beneficial for the United States, as large markets have
developed for leg meat in Russia and wings, wing tips, and feet in Hong Kong and China.
U.S. advantages—disease-free status, domestically grown feed, and economies of
size—position the U.S. industry to profit from greater freedom in global meat trade. The
United States will continue to increase its production and exports to help fill global
demand. However, Brazilian poultry production and exports are growing at a faster pace,
as the devaluation of the Brazilian currency “Real” provides an advantage in the export
marketplace.
15
0.0
50.0
100.0
150.0
200.0
250.0
300.0
350.0
400.0
450.0
Alabama Arkansas Georgia Mississippi North Carolina
State
Valu
e (M
illio
n D
ollo
rs)
Year_1997Year_1998Year_1999Year_2000Year_2001
Figure 2.5. U.S. Poultry and Products Exports by State
Source: U.S. Agricultural Trade Update (FAU series), Economic Research Service, USDA. Webpage: http://www.ers.usda.gov/data/FATUS/DATA/16010.xls.
Figure 2.5 shows U.S. poultry exports by state. Georgia, Arkansas, North
Carolina, Alabama, and Mississippi are the largest five poultry export states. Georgia’s
poultry exports in 2001 were valued at $308.8 million. Note that we the chicken exports
data by state are not available, but the poultry data should be representative of chicken
exports because U.S. poultry exports are primarily chicken meat.
2.3. Category of Chicken Meat in Trade
In the Harmonized Tariff Schedule (HTS) code system, chicken meat is divided
into four categories: fresh/chilled whole chicken (HTS code: 020711), frozen whole
16
chicken (HTS code: 020712), fresh/chilled chicken parts (HTS code: 020713), and frozen
chicken parts (HTS code: 020714).
Wholechicken(fresh,chilled)
Wholechicken(frozen)
Chickencuts
(fresh,chilled)
Chickencuts
(frozen)
Canada
China
Hong KongJapan
KoreaMexico
Russia
0
500
1000
1500
2000
2500
Million Dollar
Canada China Hong Kong Japan Korea Mexico Russia
Figure 2.6. U.S. Chicken Meat Exports (1997-2001 Total)
Source: USITC (The United States International Trade Commission) Interactive Tariff and Trade Dataweb. Webpage: http://dataweb.usitc.gov/.
Figure 2.6 shows the total value of exports of U.S. chicken meat. The highest
valued chicken meat export category is frozen chicken parts (HTS code: 020714) for all
the top import countries listed in the graph, except for Canada. In this study, we will
17
focus on the trade of frozen chicken parts. From 1997 to 2001, the total value of Russia’s
frozen chicken parts imports was $ 2.2 billion, followed by Hong Kong/China at $1.72
billion. These two markets accounted more than 60 percent of the world imports of U.S.
frozen chicken parts.
Under category 020714, frozen chicken parts are further divided into five
categories: chicken leg quarters (HTS code: 0207140010), chicken legs excluding leg
quarters (HTS code: 0207140025), chicken wings (HTS code: 0207140030), chicken feet
(HTS code: 0207140045), chicken offal (HTS code: 02071450), and others (HTS code:
0207140090).
Figure 2.7 shows the total value of exports of U.S. frozen chicken by part and
country for the period 1997-2001. Russia’s imports are mostly chicken leg quarters and
“others”, and Hong Kong/China’s top imports are chicken feet and “others”, but the
composition of “other” chicken parts is not clearly defined in the data documentation.
Note that HK is the leading importer of chicken feet, legs, wings, and offal, and this
makes Hong Kong the second largest importer of U.S. chicken, trailing only Russia.
Comparing the exports to Hong Kong and those to Russia, we can see that Hong Kong’s
chicken imports are of more variety, and in general, the parts exported to Hong Kong are
different from those exported to Russia, thus, these two biggest importers are occupying
different U.S. chicken part markets.
18
LegQuarters Legs Wings
FeetOffal
Others
Canada
China
Hong KongJapan
KoreaMexico
Russia
0
0.2
0.4
0.6
0.8
1
1.2
Billion Dollar
Canada China Hong Kong Japan Korea Mexico Russia
Figure 2.7. U.S. Frozen Chicken Parts Exports (1997-2001 Total) Source: USITC (The United States International Trade Commission) Interactive Tariff and Trade Dataweb. Webpage: http://dataweb.usitc.gov/.
2.4. U.S. Chicken Meat Exports to Hong Kong/China
Hong Kong is the world’s second-largest poultry meat importer. However, the
majority of poultry meat imports to Hong Kong are transshipped to Mainland China, with
re-exports accounting for about 70 percent of Hong Kong’s imports. Less than a third of
China’s poultry meat imports are direct, with the rest transshipped through Hong Kong.
19
Because Hong Kong re-exports large quantities of poultry meat to the rest of China,
while also importing meat from Mainland China, the markets are tightly linked.
The US has been a major supplier of poultry products to Hong Kong/China
because of abundant supplies and a big variety of product grades. Popular US cuts
include mid-joint wings and whole legs for Hong Kong, and drumsticks and chicken feet
for China. The exported products from the U.S. do not conflict much with China’s
domestic supply due to Chinese consumption habits. More than 70 percent of U.S.
chicken products exported to China are chicken feet, offal, wingtips and gizzards, and
Chinese domestic producers cannot satisfy the demand for these chicken parts without
imports.
Figure 2.8 shows that chicken feet has been a major component of U.S. chicken
parts exports, and its export volume increased from 0.118 million MT in 1997 to 0.280
million MT in 2001. Chicken legs, wings, and offal exports also increased markedly since
1997. Note that due to Russia’s economic crisis in 1999, Hong Kong imported
significantly more chicken leg quarters in 1999, and decreased its imports after Russia’s
economic recovery in 2000.
The Hong Kong/China market grew rapidly during the 1990s. From 1992 to 1996,
U.S. poultry meat exports to HK/CH more than tripled, reaching nearly 600,000 tons.
The Asian financial crisis began in July 1997. A wave of currency devaluations,
stock market plunges, and business failures severely battered the economies of Indonesia,
Malaysia, the Philippines, Thailand, and Korea, and quickly affected the economies of
Hong Kong/China, although the currencies of China and Hong Kong are pegged to U.S.
20
dollar. The Asian financial crisis has not depressed U.S. broiler exports, although it has
had negative effects on shipments of other poultry exports.
0
50
100
150
200
250
300
1997 1998 1999 2000 2001
Year
Qua
ntity
(1,0
00 M
T) leg quarterslegswingsfeetoffalothers
Figure 2.8. U.S. Frozen Chicken Parts Exports to Hong Kong/China Source: USITC (The United States International Trade Commission) Interactive Tariff and Trade Dataweb. Webpage: http://dataweb.usitc.gov/.
At the beginning of 1998, U.S. broiler exports to Hong Kong/China fell
significantly as consumers avoided all chicken products following a scare that Avian
influenza might be able to pass from poultry to humans. By the early spring of 1998,
however, exports of broilers to Hong Kong/China rebounded to levels above the previous
year, and through September were 2 percent above the same period in 1997.
In 2000, while renewed Russian demand for U.S. leg quarters reduced the volume
of this product going through Hong Kong, shipments of feet and wings were up. Vibrant
21
demand in Mainland China for feet and wings sparked an increase in re-exports. The U.S.
remained the leading supplier of poultry products for the Hong Kong market by
occupying a market share of 65 percent, which was far ahead of the second supplier,
Brazil (12 percent). However, U.S. chicken exports to Hong Kong dropped about 5
percent in the year 2000. Conversely, Brazilian chicken exports rose about 41 percent.
One possible reason is that prices of Brazilian products dropped almost 12 percent in
2000. Nonetheless, the U.S. has a big variety of product cuts at different product grades.
This distinct advantage enables the U.S. to continue to remain as the largest supplier of
chicken products for the Hong Kong market.
In 2001, as the Russian market for US poultry products was open again, the US
supplies to the Hong Kong/China market were relatively less and average C.I.F. prices
were higher when compared to previous years when US has reduced access to the
Russian market. Due to the higher world prices, China chicken imports were down in
2001.
While growth in exports to the Hong Kong/China market has benefited the U.S.
broiler industry, the trend has not strengthened prices as dramatically as it would in other
markets. The reason lies in the composition of products shipped to Hong Kong/China.
More than 20 percent of all broiler products exported there consist of chicken feet.
Without this market, almost all of these parts would go to renderers for eventual use as
feedstuff. These exports represent a definite gain to broiler processors, but their absence
from the U.S. domestic market does not affect prices for broiler parts traditionally
consumed in the U.S. (Harvey, 2000).
22
Figure 2.9 shows the prices (value per unit) of U.S. chicken parts exports to Hong
Kong/China. Overall, the prices decreased over the years. Comparing the prices of
different chicken parts. Chicken feet price is the lowest, with average of $0.51/kg. Note
that the prices shown in the graph are 3-month moving average smoothed prices.
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
1.1
1.2
1.3
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46
Time Period
Valu
e pe
r Uni
t (D
olla
r/Kg)
legs wings feet offal others
Figure 2.9. Prices of U.S. Frozen Chicken Parts Exports to Hong Kong/China (January 1997-December 2000) Source: USITC (The United States International Trade Commission) Interactive Tariff and Trade Dataweb. Webpage: http://dataweb.usitc.gov/.
While price may be the deciding factor in purchasing decisions by Chinese
wholesalers, quality, specifications, and packaging are becoming increasingly important.
Hong Kong traders always hope that U.S. products can improve their packaging which is
strong enough to survive after long transportation to inland China.
23
Chinese retailers do not know about U.S. poultry because of the lack of
production origin label. Once frozen chicken parts are shipped to China, they are loaded
on non-refrigerated trucks. Smaller packages go directly to large retail stores, while large
packages are defrosted for sale in smaller retail stores or local wet markets, which leaves
the consumer unaware of origin. As the market liberalizes, U.S. exporters will need to
sell a branded product to be competitive. Already in wholesale and retail markets, the
domestic product is sold in well-packaged, branded form (Morgan, 1997).
Import channels to the wholesale and wet markets are well established but not to
supermarkets. Also, U.S. processors do not package consumer-sized portions for
supermarkets. Small package food products are preferred because of the limited living
space in Chinese urban area.
2.5. U.S. Exports to Other Countries
2.5.1. Russia
The financial crisis in Russia affected the trade in poultry parts in 1998. Extreme
currency fluctuations, difficulties in getting letters of credit and overall price uncertainties
stopped trade temporarily. Following the August 1998 devaluation of the ruble, exports to
Russia during the first eight months of 1999 were more than 80 percent below the level
for the same period in 1998 (USDA, 1999).
Until the ruble devaluation in August 1998, broiler exports had proceeded at a
record pace and prices had been fairly strong. After devaluation, exports fell
dramatically, and prices for most parts declined. By December 1998, the drop in exports
to Russia sent U.S. Northeast prices for leg quarters plunging to 18 cents, a 50-percent
24
decline from 36 cents in August. U.S. poultry meat exports continued to suffer from the
near total collapse of the Russia commercial import market.
In 2000, while Russian poultry production was recovering slowly, commercial
imports of poultry meat had strengthened due to higher prices domestically, and
improved Russian economy, and a stabilization of the rules governing imports. As the
Russian market for U.S. poultry products was open again, the U.S. supplies to the Hong
Kong/China market were also affected. With the higher demand for U.S. chicken
products in the Russia market, U.S. shipments to HK/CH were less and average C.I.F.
prices were higher. Traders revealed that the prices of leg quarters around August 2001
was as high as $0.40/lb when demand in the Russian market was extremely keen before
the winter season. The market in China cannot afford to buy products at such a high
price, leading to decreased imports.
3. Hong Kong/China Poultry Production and Consumption
3.1. Hong Kong Production and Consumption
Hong Kong’s poultry supply is primarily from imports. Hong Kong’s local
production only contributed 18 percent of its chicken meat consumption. Poultry meat
production in Hong Kong is comprised mainly of live poultry imported from China and
slaughtered locally (USDA, 2000b).
Consumption of poultry products in Hong Kong is primarily chicken. In 2001,
Hong Kong consumed about 353,000 MT of poultry products, 86 percent of which were
chicken products. Turkey only constituted about 7,000 MT, with ducks, geese and quail
occupying the rest of the market share. Out of the 303,000 MT of chicken products
25
consumed annually in Hong Kong, live chickens took up a share of 22 percent. Hong
Kong is a mature market for meat consumption, which will likely not experience any
drastic changes (USDA, 2002b).
Hong Kong consumers’ consumption pattern has gradually changed over the past
few years. Low international prices make imported product attractive, and there is a
growing local acceptance of chilled and frozen poultry versus freshly slaughtered. As
shown in Table 2.1, Hong Kong people are more receptive to chilled/frozen products and
consuming more chilled/frozen poultry products at the expense of live chickens resulting
from changes in eating and shopping habits. This trend is expected to deepen in the
future (USDA, 2002b).
The drastic changes in Table 2.1 for 1998 figures were caused by the bird flu
crisis, which served as a catalyst encouraging consumers to buy frozen products when
fresh products were in short supply. The total consumption of fresh chickens has
rebounded significantly since 1999. For chilled/frozen products, consumption has
consistently increased, except in 1999 after a significant jump in 1998. In the very long
term, the market share of live chicken is expected to shrink gradually while the
consumption of chilled/frozen products will rise.
26
Table 2.1. Hong Kong Per Capita Consumption Between Fresh and Chilled/Frozen chicken
Per capita consumption Total consumption Year Product Kg 1,000 MT
Fresh 11 67 1996
Chilled/frozen 32 204
Fresh 10 67 1997 Chilled/frozen 35 226
Fresh 8 53
1998 Chilled/frozen 45 299
Fresh 9 63 1999 Chilled/frozen 43 292
Fresh 9 65 2000 Chilled/frozen 44 308
Source: “Attaché Report: Hong Kong Poultry and Products Semi-Annual, 2001”, Foreign Agricultural Service, (February 2001): 25.
3.1.1. Bird Flu
Hong Kong suffered its first “bird flu” virus in late1997. The effect of the flu
scare was devastating for poultry consumption. Even though trade representatives were
able to point out that frozen poultry parts from the United States did not have avian
influenza, consumers in Hong Kong were reluctant to trust any poultry product. The
poultry consumption rebounded somewhat in January 1998 but only to around 40 percent
of pre-avian flu crisis levels. By the time the crisis was over the government had
destroyed more than a million chickens in Hong Kong.
As a result of the influenza scare, the government banned imports of live birds
from China from late December 1997 through February 7, 1998 and adopted more
stringent sanitary requirements for licensing of chicken farms. Hong Kong did not have
27
live chicken supplies for months, which allowed the consumption of frozen chicken and
red meats to surge. Red meat consumption reportedly jumped 30-40 percent, as
consumers substituted beef or pork for chicken. In China, the “bird flu” resulted in lower
prices and constrained import demand as Hong Kong restricted access for live birds
coming from southern China (USDA, 1998a).
In the year 2001, Hong Kong suffered its second bird flu. In May the Hong Kong
government destroyed over 1.3 million chickens following the death of many chickens in
various wet markets throughout Hong Kong. Retail sales of live chickens resumed on
June 16, 2001 after one-month suspension. Since the second bird flu crisis, both Hong
Kong and Mainland Chinese governments have been very strict in observing the safety
surveillance program, and this perhaps explains why Hong Kong’s importation of live
chicken dropped from 100,000 birds a day to around 80,000 birds a day. Retail sales of
frozen chicken dropped about 20 percent during the crisis, and frozen chicken imports
were affected to some extent.
None of the bird flu incidents caused any long term effect on U.S. chicken
exports. In Hong Kong, chicken consumption and imports resumes only after one
months’ recovery. But the long term effect of the live chicken scare on Hong Kong
consumption patterns may persist. Hong Kong consumers are shifting some of their
consumption from live chicken to frozen chicken.
28
3.2. China Poultry Production, Consumption, and Exports
With 1.3 billion people and a GDP growing about 7 percent a year, China is a
major market with significant growth potential. The United States is the largest
agricultural supplier to China, but there is a lot of competition.
China’s livestock (pork, beef, and poultry) output played an important role in
global meat production over the last decade. China’s meat production has increased 10
percent annually since 1988. When China’s production is excluded, global production of
meat has risen only about one-half percent each year (Greene and Southard, 1998).
3.2.1. China Poultry Production
China’s broiler industry is focusing on the huge domestic market as well as
foreign markets. Moving into position as the world’s second largest poultry meat
producer, China remains a pivotal component of the world poultry meat complex. Indeed,
the longer term outlook of world trade hinges on China’s ability to expand production to
meet its consumption requirements (USDA, 1997a).
China’s poultry production increased rapidly after 1980, although data on poultry
meat and egg production are less reliable than other livestock data because such a large
proportion of the birds are produced by individual farm households, rather than in
specialized operations.
Lower feed prices in 1997 have supported significant production increase in
China, slowing demand for imports. Expansion in domestic poultry meat output in China
and lower prices have made it more difficult for broiler imports to compete against
domestically produced product. In recent years, poultry production growth in China has
29
been modest, around 2 percent, as low feed prices are offset by low product prices. Low
prices are forcing many small-scale poultry operations to close, but as the industry
consolidates, production is expected to climb to meet the growing demand for low-priced
protein (USDA, 2000b).
Grain price policy reforms, implemented in April 1998, have led to a clampdown
on private sales of grains. All buyers are now required to purchase feed inputs from grain
bureaus at prices considerably higher than world prices. This implies a higher cost, less
efficient poultry meat industry in the future. Poultry meat (which includes duck and
goose meat) output in China during 2001 is 12.7 million tons, up by 2 percent from 2000.
3.2.2. China Poultry Consumption
Although current per capita consumption of animal proteins is lower in China
than that in wealthier nations, it is increasing rapidly as China’s economy and personal
incomes grow. China has the potential to become a growing market for animal protein
imports, as demand for meats, fish, eggs, and milk is expected to outgrow domestic feed
grain supplies. For the past decade, Chinese poultry meat consumption has grown at a
double-digit pace.
Poultry is a staple food for the Chinese consumers. Consumers are very sensitive
to prices. Popular cuts for Chinese consumer include chicken feet, leg quarters and 3-
joint wings. In comparison, the more expensive mid-joint wings from the U.S. have little
market in China except in some higher income areas like Shanghai.
30
3.2.3. China Chicken Product Exports
China is a major player in the world poultry meat market, both on the import and
export side of the trade equation. China remains a net importer of poultry on a volume
basis, and a net exporter on a value basis.
China’s largest target export market is the Japanese market. Benefiting from
lower labor and transportation costs, China has aggressively challenged Thailand, Brazil,
and the United States in the Japanese market. China exports higher valued products to
Japan while keeping lower valued products for domestic consumption. This segmentation
dovetails with the traditional tastes of Chinese consumers, who prefer dark meat parts,
wings and feet.
Historically, China has exported not only domestically produced product to Japan
but also imported poultry meat that has been processed to Japanese specifications and re-
packaged in smaller containers. Chinese poultry meat exports to Japan has dropped since
1998. A depressed Japanese economy and weak currency has led to relatively stagnant
demand for imported product. This combined with strong competition from more cheaply
priced Thai broiler meat has damped demand for Chinese product. This resulted in
constrained demand in China for imported chicken. Poultry prices in China dropped
about 30 percent due to the oversupply situation. Hong Kong traders dealing with
transshipment did not foresee the situation. They accumulated large inventories and
incurred big losses due to storage costs (USDA, 1998a).
China is also the largest supplier of whole birds to Hong Kong market. The
Chinese government has announced that effective January 1, 2002, chilled/frozen chicken
products can be exported to Hong Kong without going through any sole agent. They have
31
also lifted their export quotas on chilled and frozen beef, pork and chicken to Hong
Kong. Poultry exports to Hong Kong, particularly whole chickens, are expected to rise. It
will not be in direct competition with the U.S., because Hong Kong’s imports from U.S.
are mainly frozen chicken parts, not whole chicken.
In May 2001, the EU lifted a five-year ban on imports of frozen chicken from
China. The ban had been imposed in 1996 due to hygiene concerns. Prior to the ban,
China’s average annual exports of poultry meat to the EU amounted to 50,000 MT,
roughly one sixth of China’s total poultry exports. It is expected this policy change will
allow more exports to EU, but the progress will be slow, and the exports volume will not
reach previous levels.
4. Hong Kong/China Poultry Imports
4.1. Hong Kong Chicken Meat Imports Overview
Because Hong Kong is a major transshipment point for poultry meat to China, and
the majority of poultry imports by China pass through Hong Kong, Hong Kong has
become a leading poultry meat importer.
Hong Kong local demand, reflected by retained imports, was basically constant
over the years and it has not been a factor contributing to Hong Kong’s fluctuation of
imports, except for the whole bird category. Hong Kong’s chicken meat re-exports to
Mainland China is the real factor that causes the changes of Hong Kong’s total imports.
Because almost 70 percent of Hong Kong’s imports are re-exported to China, and
China’s direct imports are of very little volume compared to Hong Kong’s imports, it’s
32
informative to focus on Hong Kong’s chicken meat imports as well as combined Hong
Kong/China imports.
Table 2.2. Volume and Value of Chicken Meat Imports to Hong Kong, January - November Volume (MT) Value ($ million)
Country 2000 2001 Change 2000 2001 Change United States 658,451 550,709 -16 % 426 373 -12 % Brazil 124,750 119,971 -4 % 99 96 -2 % China 21,567 30,374 41 % 38 48 28 % United Kingdom 30,051 23,072 -23 % 24 18 -25 % Canada 32,428 19,897 -39 % 23 14 -39 % Thailand 17,629 19,546 11 % 22 24 9 % Netherlands 27,884 18,837 -32 % 23 15 -35 % The World 967,298 836,874 -13 % 695 628 -10 % Source: “Attaché Report: Hong Kong Poultry and Products Semi-Annual, 2002”, Foreign Agricultural Service, (Feb 2002): 8.
Table 2.2 shows the U.S. is still the largest chicken meat exporter to Hong Kong,
with a market share of 66 percent in 2001 on value base. Brazil occupied 14 percent of
this market, followed by Mainland China, UK, Canada, Thailand and Netherlands. The
lower imports in 2001 can be explained by the expected China’s accession to the WTO.
Hong Kong importers believed that it became more difficult for their products to get into
China after China became a WTO member because the Chinese authorities issued less
import licenses and allowed less import volume (USDA, 2002c). In the first ten months
of 2001, Hong Kong’s imports of chicken products decreased about 10 percent mainly
because of the decrease in Hong Kong’s chicken re-exports to China (-18 percent). The
import of major re-export categories decreased: chicken feet (-5 percent); chicken wings
(-4 percent); chicken frozen cuts (-37 percent). Hong Kong’s import of chicken frozen
33
cuts dropped remarkably by 37 percent as a result of U.S.’ reduced supply of leg quarters
to Hong Kong, much of the supplies of U.S. leg quarter have been diverted back to the
Russian market (USDA, 2002b).
4.2. Hong Kong/China Imports from Brazil
Brazil is the world’s second largest broiler exporter. Brazil experienced all time
records in production, exports and profit margins in 2001. Broiler production was up 10
percent due to record exports, devaluation of the Brazilian currency, increase in average
slaughter weight, low cost of production and improved productive capacity. A strong
U.S. dollar would maintain Brazil’s competitiveness in world markets even with
increased production cost in 2002.
Traditionally, Brazilians had been whole bird exporters, however in 2001 chicken
parts exports surpassed whole bird levels. The devaluation of the Brazilian Real made
Brazil more competitive on the world market. Brazil significantly increased chicken cut
exports to the world. Although U.S. keeps its dominant role in Hong Kong imports,
Brazil has been increasing its market share from 8 percent in 1996 to 14 percent in 2001.
The merits of Brazilian products, according to Hong Kong importers, are their
consistent product quality and good packaging. Their distinct packing method, solid layer
packing, offers great convenience for users.
Brazil is very strong in the supply of its 3-joint wings and whole birds. Among the
various cuts of Brazilian poultry exported to Hong Kong, chicken wings were the biggest
category. Besides 3-joint wings, Brazil is also very strong in the supply of whole birds.
34
Brazil increased its supply of whole chickens to Hong Kong in response to the rising
demand locally.
Table 2.3. Hong Kong Imports of Chicken Products
Country 1996 1997 1998 1999 (Jan-Oct)
2000 (Jan-Nov)
2001 (Jan-Nov)
MT U.S. 507,633 539,816 538,756 631,629 658,451 550,709 U.S. Share 68 % 66 % 64 % 70 % 68 % 66 % Brazil 58,192 76,507 73,844 82,547 124,705 119,971 Brazil share 8 % 9 % 9 % 9 % 13 % 14 % World 746,063 814,746 839,432 896,176 967,298 836,874 Source: “Attaché Report: Hong Kong Poultry and Products Semi-Annual,” “Attaché Report: Hong Kong Poultry Annual,” Foreign Agricultural Service, various issues, 1996-2002.
Unlike the U.S., Brazil is not able to supply a wide product range to the Hong
Kong market. Another disadvantage of Brazil in terms of its exports to Hong Kong is
expensive freight costs, which currently stand at $5,500 - 5,800 for a 40ft container with
a load of 25 tons. In comparison, the freight between the West Coast of the U.S. and
Hong Kong costs around $ 2,500 (USDA, 2001a).
4.3. Hong Kong-China Transshipment
4.3.1. General Description
Hong Kong is a free market, imposing no tariffs on food imports. There are no
price regulations or import controls. Hong Kong is the world’s largest container port.
Many U.S. agricultural exports make their way into China through Hong Kong. Its duty-
free status and proximity to China have allowed Hong Kong to become the eighth-largest
35
destination for U.S. agricultural exports, and fourth-largest for U.S. consumer-ready
products.
Before July 1997, Hong Kong was a British colony. On July 1, 1997, Hong Kong
was assimilated into China, concern abounded about the status of Hong Kong as a
transshipment point into China. According to Chinese law, Hong Kong’s trade policy
following the integration is to remain unchanged. As such, import regulations and Hong
Kong’s status as a free port which does not levy import tariffs on poultry products
remains unchanged.
Hong Kong retains its own import system. Most re-exports from Hong Kong to
China are handled by Hong Kong transport companies that provide freight forwarding
services to Hong Kong importers, moving their goods into China, taking care of
documents and paying tariffs. These companies’ fees reflect shipping conditions at
Mainland China ports, and they typically rise when the Chinese government institutes
crackdown measures, such as more stringent sanitary standards. The periodic crackdowns
contribute to uncertainty about dependable access to China, thereby inhibited the trade
environment.
In 2001, 47 percent of Hong Kong’s agricultural imports from the United States
were re-exported to China. Direct U.S. exports of broilers to China, the seventh largest
market for the United States, were valued at $33 million. However, U.S. broiler exports
to Hong Kong, for direct consumption there and re-exports to China, accounted for an
additional $335 million. Many observers believe that in the next three or four years,
China’s import liberalization will result in the rechanneling of an increasing share of
imports directly to Chinese destinations. While Hong Kong’s share of this trade will
36
likely decline as China becomes further integrated into the WTO, the absolute volume of
China’s imports should climb (USDA, 2001b).
4.3.2. Poultry Transshipment
Most of the poultry products re-exported to China from Hong Kong are handled
by transport companies. As China’s improved transportation systems allow more
imported poultry products to reach inland markets, re-exports to China are also
increasing.
Consumer preferences in Hong Kong and China differ significantly given the
large gap in living standards. While approximately 65 percent of Hong Kong’s imports
are redirected to China, most of the more expensive chicken parts such as mid-joints,
wings, and legs stay in Hong Kong. The less expensive parts, such as offal, gizzards, low-
priced mid-joints, and particularly feet and paws, are the best selling items in the Chinese
market (USDA, 1997b).
In principle, China is able to absorb large volumes of Hong Kong’s re-exports
provided that products are cheap. However, there are two potential unfavorable factors
for increased re-exports: Lower prices of domestic products and higher transportation
costs. Agricultural production in China has increased and prices have become lower
because of increased supplies. The transport cost of Hong Kong’s poultry re-export to
China has increased. The transport fees charged to handle this trade have several
components: import duties, customs valuation of container loads, and profit margin.
Industry sources pointed out that transport prices have been increasing in recent years,
mainly because of more accurate valuation of goods in containers by Chinese custom
37
officials, who have far better knowledge of product prices than in the past (USDA,
2001a).
There is a growing trend for U.S. products to be re-exported to China, de-boned in
Mainland China and then re-imported into Hong Kong for consumption. Table 2.4 shows
the latest report on U.S. chicken parts re-exports. The share of Hong Kong’s poultry re-
exports to China decreased from 85 percent in January - October 1999 to 82 percent in
January - October 2000. Comparing figures for the first 10 months of 1999 and 2000, the
share of re-exports of chicken feet to China remained the same, and chicken wings
increased from 73 percent to 75 percent and chicken frozen cuts dropped from 85 percent
to 73 percent.
38
Table 2.4. Percentage of U.S. Chicken Products Imported to HK being Re-Exported to China, January - November
MT, 2000 MT, 2001
U.S. chicken product imports to HK 658,451 550,709
U.S. chicken product import to HK being re-exported to China
558,778 451,875
% of US chicken product imports to HK being re-exported to China
85 % 82 %
U.S. chicken feet imports to HK 294,269 286,591
U.S. chicken feet imports to HK being re-exported to China
260,472 255,977
% of US chicken feet imports to HK being re-exported to China
89 % 89 %
U.S. chicken wings imports to HK 114,209 114,189
U.S. chicken wings imports to HK being re-exported to China
83,282 85,307
% of U.S. chicken wings imports to HK being re-exported to China
73 % 75 %
U.S. chicken frozen cuts imports to HK 228,453 134,127
U.S. chicken frozen cuts imports to HK being re-exported to China
194,110 97,930
% of U.S. chicken frozen cuts imports to HK being re-exported to China
85 % 73 %
Source: “Attaché Report: Hong Kong Poultry and Products Semi-Annual, 2002”, Foreign Agricultural Service, (Feb 2002): 8
4.4. Trade Policies and Regulations
Since most of Hong Kong’s poultry imports were re-exported to China, China’s
trade policies could have a significant impact on Hong Kong’s poultry trade. China
reduced import duties on a variety of products including poultry products effctive
October 1, 1997. Import duties were reduced from 45 percent to 20 percent. The effect on
imports was limited, however, with traders stating that it was more cost effective to move
product through “transportation companies” operating near the Guangdong border.
39
Southern China (Guangdong) ports are the primary entry points for imported poultry. The
cost for moving product through these transportation companies (around $180/ton) was
still less than paying the 20-percent tariff. Since the effective rate through “unofficial
channels” is still about 13 percent, the reduction in import duty had little effect on Hong
Kong’s re-export trade to China (USDA, 1998a).
China became a member of the World Trade Organization (WTO) on December
11, 2001 (source: the WTO Internet site). China’s accession to the World Trade
Organization will mean a lowering of the poultry import duty from 20 Percent to 10
percent and a more transparent import regime which should also stimulate imports. After
entering the WTO, China reduced the tariff rate on frozen broiler products, but the
reduction still did not fully meet China’s WTO commitments.
China’s accession to the WTO would also mean that U.S. exporters could look
forward to lower tariffs for poultry meat imports. An ensuing transparent import regime
would provide for more price stability and less risks for both exporter and importer. After
its reunification with China, Hong Kong maintains separate representation to several
international organizations, including the WTO, the World Customs Organization and the
Asian Development Bank.
Now that China has entered the WTO, reductions of duties and the easing of
improper import restrictions will make Shanghai, Dalian, Tianjin and other mainland
ports attractive entry points. For the foreseeable future, trade will continue through Hong
Kong.
The eventual implementation of the U.S.-China Agricultural Cooperation
Agreement could also reduce the role of Hong Kong as a transshipment point. But the
40
Chinese Government must change many of its entry and inspection procedures to comply
with the agreement, and it is still in the process of being implemented.
4.5. Hong Kong/China: Chicken Imports Potential
China promises to be an important and growing market for poultry meat in the
future. A population 10 times as large as Russia, an expanding middle class, and relative
low per capita consumption levels suggest that consumption will continue to grow.
Poultry meat accounts for only 18 percent of China’s meat market, compared to
30 percent in many developed countries and 37 percent in the United States. A shift in
consumer preferences as consumers diversify away from pork towards poultry and
seafood will accelerate the growth in demand for chicken meat, supporting growth in the
domestic industry as well as imports.
The rapid growth of the fast-food sector and the development of a food processing
industry will add to the steady increase in poultry consumption, which has been rising 14
percent annually over the past decade. Kentucky Fried Chicken (KFC) has opened over
150 outlets in China. Additionally, McDonald’s, Pizza Hut and other food chain stores
are prolific in China.
During the past decade, the supermarket has made impressive progress in China.
Consisting first of local chains, and joined by foreign hypermarkets, these large stores
offer incentives and opportunities for increased market access to trade.
Consumption patterns are moving gradually away from the preference for live
chickens to frozen chickens. The change in preference will also increase the demand for
U.S. frozen chicken parts. Chinese consumers used to shop for food daily because of
41
preference for fresh food, however, some Hong Kong/China consumers, especially the
younger generation, have become accustomed to buying chilled and frozen chickens from
supermarkets. There has been growing popularity of frozen food stuff because that many
working women cannot afford the time to do grocery shopping daily, that ready-to-cook
frozen food has become more popular, and that consumers care more about food safety
and nutrition.
42
CHAPTER 3
RELATED LITERATURE
1. China Poultry Production Issues
Despite a long history of livestock-raising activities, China’s livestock industry
did not begin to develop rapidly until the mid-1980s (Tuan, Cao, and Peng, 2001).
Production growth was stimulated not only by general market-oriented policy reforms,
but also by direct government support for specialized poultry breeding operations
(USDA, 1998b). “Official estimates indicate that output more than doubled from 1.5
million tons in 1984 to 3.2 million in 1990. During the 1990’s, China’s poultry meat
production accelerated at an annual rate of 22 percent, reaching 11.5 million tons in
1997” (Crook and Harvey, 1998).
Some research categorized Chinese poultry production units into three groups of
different scales: specialized production, traditional backyard production, and large-scale
production. Statistical sources in China define specialized poultry producing households
as those that devote most of their labor and receive most of their income from poultry
operations. The number of specialized households increased rapidly after rural reforms
were initiated in the early 1980s. Typically, a specialized household will raise five
batches of broilers in a year with 1,000 to 2,000 birds in a batch. In some areas, the
specialized households serve as contract growers for large integrated poultry operations.
43
Researchers estimate that specialized households produce about 40 percent of China’s
poultry output (Crook and Harvey, 1998).
Households specializing in livestock-production activities as their principal
occupation now account for an increasing share of production. However, most meat is
still produced with traditional “backyard” methods—that is, rural households raise
animals on a small scale to supplement their farm income. (Tuan, Cao, and Peng, 2001).
Tuan, Cao, and Peng (2001) compared the price responsiveness of specialized households
and traditional backyard operations, and they concluded that, these specialized
households rely far less on homegrown grain and farm by-products and are more
responsive to grain prices than traditional backyard operations.
Crook and Harvey (1998) reported, “Many traditional farm households keep a
flock of poultry around the farmstead to forage in the fields for whatever they can eat,
supplemented by some feed. Researchers estimate that this traditional method accounts
for about half of total poultry output.”
In the 1990s, many large-scale integrated poultry operations began to emerge.
Currently, there are many large-scale poultry facilities in China, mostly located around
large urban areas and near east coast ports. Some are wholly domestic facilities, but many
are joint ventures with firms from the United States, Singapore, Thailand, Hong Kong,
Taiwan, and Japan. These facilities typically are either near major urban population
centers, or near low-cost transportation routes, where poultry products are sold both to
local urban consumers and to the export market. Modern facilities produce about 10
percent of poultry output. They supply a large share of poultry for urban consumers. For
44
many of these joint venture operations the purpose was to serve not only the domestic
market, but also to export poultry products, primarily to Japan (Crook and Harvey, 1998).
Fuller and Fang (1999) studied the price responsiveness of feed demand by
traditional and specialized household producers of pork and poultry in China and
simulated the impact of changes in the structure of Chinese livestock production on world
feed grain trade. Their feed demand estimation reveals that traditional backyard
producers have very inelastic demands for feed grains. For the traditional producers, the
per capita quantity of grain the household produces and regional differences are
significant determinants of feed grain use. For the specialized household producers, feed
grain demand is roughly twice as responsive to feed prices changes as demands by
traditional households. The larger response to prices reflects that greater dependence of
specialized household producers on markets for their feed inputs. Their results also
suggest that the modernization of China’s livestock sector will not place unmanageable
strains on the international grain market, nor will it greatly increase China’s dependence
on imported grain.
Pork and chicken meat are China’s major livestock products. Some researchers
projected the future production/consumption of these meats, and examined the poultry
production growth rate. Crook and Colby (1998) state that pork still remains the preferred
meat in China, but the price for pork may rise relative to other meats (including chicken
meat) unless China is able to increase grain and oilseed production to meet domestic feed
requirements. They added that a relative increase in the pork price vis-à-vis other animal
protein products will induce consumers to switch to other products.
45
Crook and Colby’s statements are further confirmed by Tuan, Cao, and Peng
(2001), “Poultry production, with its high feed-conversion ratio, has made more efficient
use of China’s feed supply. Poultry’s share of China’s total meat production grew from
11 percent in 1990 to near 19 percent in 1999.”
China is world’s largest producer and consumer of most livestock meat
products, but trade accounts for very small share of the livestock
economy. Government policies have severely limited the exposure to
world markets. In the past decade, a strategy of grain self-sufficiency
limited the growth of domestic livestock production, while a strategy of
meat self-sufficiency restricted imports of livestock products (USDA,
1998b).
The challenge for China is that the country must achieve this consumption growth
with only seven percent of the world’s arable land. China must feed 5.2 people for each
acre of arable land in the country, whereas Europe feeds 1.64, the United States feeds
0.56, and the Russian Federation feeds only 0.44 people per arable acre. It has become
obvious to most experts that China will need to import feed grains or livestock products
to achieve consumer diets similar to those of the developed countries. Most experts
believe China will need to import feed grains of livestock products as its income rises
(Hayes, 1997).
2. China Poultry Consumption and Marketing Issues
“Over the past two decades, both rural and urban per capita meat consumption
has increased. Rural households (nearly 70 percent of China’s consumers) raised their per
46
capita consumption of meat and fish from 12.4 kg in 1983 to 20 kg in 1999, an increase
of over 60 percent. Urban households consumed more than twice as much meat and fish
per capita as did rural households in 1983 (30.6 kg)” (Tuan, Cao, and Peng, 2001).
Wang et al. (1998) suggested that China’s demand for animal products will
continue to grow as income increases. “Chinese meat consumption will continue to be
sensitive to per capita incomes. Continued growth in incomes at levels close to those seen
recently will cause large increases in demand for meat products”( Wang et al., 1998).
They further addressed that, if markets are allowed to decide where these additional
supplies should originate, U.S. exports of poultry and pork should increase dramatically.
A U.S. Department of Agriculture Economic Research Service analysis based on
China’s price and income statistics since the early 1980s found that poultry demand was
more sensitive to income growth than pork demand and that rural meat demand
responded more to income growth than urban demand. (Cao and Huang, 2000)
Wang et al. (1998) used two common demand systems, the almost ideal demand
system and the translog demand system to estimate the demand elasticities for six animal
products: pork, beef and mutton, poultry, eggs, fish, and milk in urban China. The
estimated poultry demand expenditure elasticity for Chinese urban household is 1.4895,
which is the highest among the five animal products. Their estimated poultry demand
own (Marshallian) price elasticity is -1.3362, which is also the highest among the five
animal products. Both the expenditure and price responsiveness on poultry demand is
elastic. The second highest expenditure and own price elasticity is for fish, with 1.1909 as
its expenditure elasticity, and –1.0253 as its own price elasticity. With Chinese
consumers’ increasing income/expenditure, and low poultry meat price, both income and
47
price effects suggest that consumers will be very likely to increase poultry consumption,
and that poultry consumption will increase faster than pork consumption, provided that
poultry production is more cost-efficient.
The USDA Broiler Team visited China in 1997 under the USDA, Ministry of
Agriculture Science and Technology Exchange Program. The team concluded that most
spent hens from traditional and specialized households, and most likely also those from
modern facilities, still are marketed through local food markets. Generally these birds are
slaughtered and consumed on the same day, reducing the requirements of cold storage.
They also noted in their trip report that birds from farm families typically are sold in local
food markets. Consumers pick out a live chicken and the vendor kills the bird, scalds it,
picks off the feathers, eviscerates it and hands the white dressed chicken to the consumer.
The team witnessed these operations in both small towns and in large metropolitan areas.
On the other hand, broilers from specialized households and from large modern
broiler operations are sold to state-owned or joint venture slaughter facilities. The fresh,
chilled, or frozen meat is sold in local food markets equipped with freezer bins, in food
stores, and in newly emerging supermarkets. Most of the frozen chicken parts the team
saw throughout China came from domestic slaughter houses. Crook and Harvey (1998)
found that frozen paws (feet) and wings from foreign countries were found mostly in
traditional local open markets (wet markets).
“As China moves from outdoor markets to supermarkets in the cities, the United
States is falling behind domestic producers. It would be best to build U.S. brand
recognition with small packages with Chinese labeling,” says Zhihong (Agricultural
Trade Office, Shanghai officer). “There are no small pre-packaged U.S. poultry products
48
available in the Chinese market, but this could possibly be done for certain chicken parts
through partnerships with well-connected Chinese firms.”
(http://www.meatingplace.com/articles/p1153.asp, 1998)
To help U.S. poultry exporters better develop China import markets, Ferris (2002)
pointed out that, Hong Kong consumers are a leading indicator of potential consumer
demand in China. With the similar ethnic makeup as its huge neighbor, Mainland China,
a healthy average disposable income ($24,000 in 2000), demanding tastes, and years of
exposure to western products, Hong Kong should be viewed as an incubator or
microcosm for long-term export projects in China and easy-entry, exporter-friendly
laboratory for the world’s most populous country.
3. Poultry Trade Issues
World trade in meats has grown rapidly since mid-1980s. The trade primarily
involves shipping cuts of meats and edible offal rather than carcasses or live animals.
Emerging patterns of trade are due only partially to relative advantages in countries’
production costs. Dyck and Nelson (2000) suggested that the disparities in preferences
among trading partners for particular meat cuts has also influenced trade patterns.
As the bulk of world poultry trade has moved from whole birds to parts,
producers have had to expand the scope of their marketing worldwide to find markets for
all the various parts of the bird. By taking into account differing income levels and the
specific consumer preferences of various regions, processors can target parts to specific
markets, and sometimes receive a better price than they could domestically. The key to
expansion for these countries will be to maintain their status as low-cost producers, while
49
simultaneously developing worldwide markets for the wide array of products that they
produce (USDA, 1998c).
Exports of broiler feet from the United States to China are a prime example. Q.
Wang et al. (1998) reported that Chinese consumers tend to discount those cuts most in
demand in the U.S. and to favor those cuts that are less desired in the U.S. and European
market.
The difference in preferences provides a marketing opportunity for U.S.
poultry meat exports. U.S. firms export wings, feet, other dark meat, and
offal to China and Hong Kong; legs to Japan; and dark meat and offal to
Mexico. These export markets pay more for such cuts than U.S.
consumers. In addition, low U.S. prices of chicken-leg quarters make them
affordable to Russian consumers, who also generally prefer dark meat.
The U.S. industry, with its ability to supply large amounts of most kinds of
meat, is likely to find new international markets where U.S. meat has a
cost advantage and /or where product preferences complement those of
U.S. consumers (Dyck and Nelson, 2000).
Dyck and Nelson (2000) reported that U.S. poultry meat and offal (hearts, livers,
feet, etc.) exports growth exceeded that of beef and pork exports since mid 1980s. They
explained that these meat trade flows are strongly influenced by factors other than costs
of supplying a market. The wide differences in U.S. and foreign consumer preferences for
broiler cuts and offal are a likely reason.
Vicente, Allen, and Reeves (1998) called this kind of trade flow “transaction
oriented.” Poultry exporters tend to offer in domestic markets products that reflect
50
national preferences. They are then challenged to find a destination where excess product
in the form of “rejected” product categories would be acceptable in order to complete the
transaction. This type of commercial operation tends to be “transaction oriented.” A
common practice is to sell surplus U.S. chicken parts in the foreign market to fulfill the
increased demand for breast meat in the U.S. market to a profitable level.
In the U.S. market, chicken breast meat is the most favorable chicken part, and the
price of chicken breast meat is also the highest among all the chicken parts. During
March to August 2002, the average price is $2.19/lb for chicken breast, $1.08/lb for
whole chicken, and $1.29 /lb for chicken legs. Price of chicken breast meat is more than
twice the price of whole chicken, and it is almost $1 higher than the price of chicken legs
(Poultry and Eggs/Online Briefing Room, USDA).
In China market, the price differences are reversed. Wang et al. (1998) states that
the internal organs typically sell at a price that is equal to or greater than muscle meat
prices in the same markets in China. Also, bone-in chicken feet are generally sold at
premium price as compared to chicken breast meat.
However, this strategy (risen from different chicken meat consumption
preferences) could be adopted in reverse by other producing countries. In
this case the processors would sell the cheaper cuts and parts on the
domestic market and more expensive cuts to higher income countries.
China has been adopting this strategy and been exporting de-boned meat
and other value-added products to the Japanese and Korean markets
(International Agricultural Baseline Projections to 2007/AER-767, 1998).
51
China’s livestock product trade has developed very slowly over the last 20
years. Currently, China exports only about 5 percent of its poultry meat
output and 1 percent of its pork and beef output. Export markets are very
localized, with most shipments going to China’s closet neighbors—Hong
Kong, Japan, and Russia. Poultry meat trade has grown rapidly over the
last 10 years. China poultry meat exports are primarily chicken thighs,
chicken breasts, and whole chickens, while imports are primarily wings,
feet and giblets (Tuan, Colby, and Cao, 2000).
As the world’s largest poultry meat exporter, the U.S. is interested in prospects
for its products in the Chinese market. According to Crook and Harvey (1998), Hong
Kong/China market is currently the second largest destination for U.S. exports of poultry
and egg products. Although China is expected to continue its broiler output, it will remain
a large market for poultry imports.
Wailes, Fang, and Tuan (1998) stated that:
Broiler imports have exceeded exports in Mainland China since 1990, and
for greater China (mainland China and Hong Kong), net imports have
increased six-fold since 1990. China’s share of U.S. farm exports, in
general, is small, but the upward trend is strong. One of the most
successful market developments for U.S. trade into China has been poultry
meat. The southern region of the U.S. has become an important supplier of
U.S. food and agricultural exports to China, especially poultry, soybeans,
wheat, and cotton. Therefore the growth experienced in these markets
52
should be, and is, reflected in the significance of export shipments from
the southern states.
Growth potential is based on China’s fundamental demand forces including the
world’s largest population, a high real-income growth rate, an emerging urban middle
class, and accession to the World Trade Organization. It’s believed that rapidly rising
consumer incomes and the increase in the number of hotels and joint-venture firms in
China’s more developed cities (such as Shanghai, Beijing, and Guangzhou) are the other
main sources of higher import demand for meat and value-added food (Wailes, Fang, and
Tuan, 1998).
However, the United States and its poultry export development agencies may
need to emphasize product differentiation promotions to try to regain some of the market
(including Chinese import market) shares captured by Brazil (Costa, 2001). The
preliminary data in his study suggests that Brazil increased market shares in the world
poultry market after the devaluation of the Brazilian Real, and the simulations suggest
that these increases in market shares may be even larger in the long run. He argued,
“Given the first year change in market shares and the longer term projections from
GTAP, major losses can result for the United States poultry export market and industry.”
4. Trade Policy Issues
“China is one of the world’s largest agricultural economies, and its accession to
the WTO and further integration into the world economy will lead to a wealthier and
more stable international food system. Under the terms of accession, China’s agricultural
trade regime will be more open and responsive to global markets. Farms in the U.S. are
53
particularly well positioned to benefit from China’s accession to the WTO because the
farming systems and underlying resource endowments in China and the U.S. complement
each other, providing opportunities for mutually beneficial trade” (Lohmar et al. 2002).
Constraints on U.S.-China agricultural trade include tariffs, food security policies,
and other non-tariff barriers (Wailes, Fang, and Tuan, 1998). The Chinese government
reduced the tariffs on pork and poultry meat imports from 45 percent to 20 percent in
1997. In addition to the import tariff, the government collects a 17 percent value-added
tax on all imported meat products, making the new effective tariff rate of 40.4 percent.
Despite these changes to diminish the barriers to meat imports, official trade in meat
products has not grown significantly after the tariff reduction. The industry perception in
the U.S. is that, even at the reduced tariff rates, it is still too costly to import meat
products through official channels. Unofficial transshipments and smuggling of pork
products into China through Hong Kong is estimated to be as much as seven times
greater than official imports. These “gray channels” are a viable, less expensive
alternative to direct imports (Wang et al. 1998).
Using a partial equilibrium model of China’s livestock and grain sectors, Wang et
al. (1998) examined the impact of a 100 percent reduction in the official tariff rate on
Chinese pork and poultry imports. The 17 percent value-added tax is assumed to remain
in place, making the effective tariff rate in the scenario 17 percent. The results for their
scenario analysis suggest that liberalization of China’s pork and poultry markets will
cause a relatively large change in world trade levels without causing any serious price
disruptions. The U.S. is in a good position to capture much of the benefits of such
liberalization because it already dominates world trade in unsubsidized poultry products.
54
So long as the trade increases generated by market liberalization are close to the levels
projected in this study, the price impact in U.S. and Chinese markets will be relatively
small, according to their estimated results.
Peterson and Orden (2002) constructed a perfectly competitive spatial partial
equilibrium model to evaluate some the policy effects on world poultry trade. The model
simulates the trade flows among six key exporting and importing countries (U.S., Brazil,
EU, Japan, China, and Russia.) and two aggregate rest-of-world regions (a rest-of-world
poultry exporting region, and a rest-of-world poultry importing region.). Effects of
removal of restrictions based on tariffs, tariff-rate quotas (TRQs) and sanitary regulations
are evaluated maintaining a distinction between “high-value” (mostly white meat: breast
meat and wings) and “low-value” (mostly dark meat: drumsticks and thighs of chicken
and turkey) poultry products. Because white and dark meats are produced in fixed
amounts per bird, they are treated as jointly produced goods in the model (Peterson and
Orden, 2002). Their results suggest that removal of sanitary barriers alone has relatively
little effect compared to removal of tariffs and TRQs, but has more effect if sanitary and
other barriers are removed simultaneously.
First, they removed all tariffs and TRQ’s but left any SPS (Sanitary and
Phytosantiary) barriers in place. This would substantially increase trade in poultry
products. The U.S. would experience about a ten times larger increase in low-value
exports (530,000 MT) compared to its increase in high-value exports (57,000 MT). The
removal of Chinese tariffs on low-value poultry would result in a 922,000 MT (103.6
percent) increase in low-value imports.
55
Second, they removed only the SPS barriers. “Because removing these trade
barriers alone does not really improve the potential for increased trade, there is little
change between the base case (with both tariffs, TRQ’s and SPS barriers.) and the results
for this scenario.”
Third, they removed all trade barriers, a true free trade scenario. This would lead
to substantial increases in high-value exports for both the U.S. and China (470,000 MT
and 310,000 MT, respectively), which displaces a greater amount of EU poultry
production than in the tariffs and TRQ’s removal case.
5. Hong Kong-Mainland China Transshipment Issues
One of the problems in understanding the potential of China’s market has been
the re-exportation and smuggling that has been significantly hidden in Hong Kong trade
data. Livestock trade is significantly affected by Hong Kong’s markets. Many products
are re-exported to China through Hong Kong, which is not reflected in China’s import
data reported by China’s customs statistics. High levels of net imports by Hong Kong in
livestock products are believed to be explained by re-exports into Mainland China
(Wailes, Fang, and Tuan, 1998).
The exact figures for transshipments through Hong Kong are not always
available, as some shipments are sent in ways to avoid China’s import duties. Because
Hong Kong re-exports large quantities to the rest of China, while also importing meat
from China, the markets are tightly linked. As the economic ties between Hong Kong and
China become even closer, it likely will become necessary to look at them as one market,
with Hong Kong as the chief port in southern China (Crook, and Harvey, 1998).
56
After China’s accession to the WTO, Hong Kong importers are seeking to
convince U.S. exporters to continue doing business through the existing channels; on the
other hand, potential partners in China could offer innovative pricing and distribution
plans that deserve serious consideration. Ferris (2002) stated, “Other than China’s
accession to WTO, there are many other factors that will also influence trade flows
among the United States, Hong Kong and China. One major consideration is ‘Financing
Considerations’. ”
Ferris (2002) concluded that Hong Kong will likely continue in its current
financial role for at least another five years, for several reasons:
• It remains difficult for private companies in China to obtain letters of credit.
• Although larger Chinese importers may be able to pay in U.S. dollars, the
majority cannot. Moreover, Chinese currency is not fully convertible outside
China.
• With Hong Kong companies, U.S. exporters are reasonably assured of getting
paid.
• Hong Kong has a Western-style legal system with the rule of law and enforceable
contracts.
As the world’s largest container port, Hong Kong can accommodate the very
largest ships. Its size and location will keep Hong Kong involved in Southern China’s
trade, regardless of import policy changes. Ferris (2002) forecasted that Hong Kong will
continue to offer significant advantages as a trade entrepot. He quoted some veteran
Hong Kong traders’ rough estimation: the share of China’s agricultural imports coming
through Hong Kong could drop from 60 percent to 30 percent. In years to come, more
57
U.S. shipments will go directly to China. However, China’s total import volume will
likely expand so much that Hong Kong’s absolute volume of re-exports to China would
remain near the current high levels for many years. “Although the trade patterns will
likely change markedly, the pace of change will be much slower than most expect, at
least 10 years” (Ferris, 2002).
6. China Data Problem
Gale (2002) reported:
Analysis of China’s economy is made more challenging by the uncertain
accuracy of the country’s official statistics. The politicization of statistics,
reliance on bottom-up administrative reporting, use of nonstandard
definitions, and parallel reporting systems in multiple agencies often make
Chinese statistics confusing and potentially misleading. Many analysts
believe that the macroeconomic statistics overstate economic growth and
understate unemployment.
Over the past decade, researchers at USDA’s Economic Research Service have
identified a number of analytical issues and anomalies associated with China’s animal
protein economy that make it difficult to assess the current situation as well as future
trends in either livestock inventories or feed grain demand. Most researchers agree that
some animals slaughtered have been double counted and that in some cases, local cadres
inflated output statistics to earn better performance evaluations (USDA, 1998d).
“Researchers in China and the U.S. have observed that per capita meat availability
as measured by government production and population statistics is roughly 50 percent
58
larger in 1996 than per capita meat consumption as measured by the State Statistical
Bureau (SSB) urban and rural household income and expenditure surveys. Scholars in
China have questioned this growing gap” (USDA, 1998d).
The data on poultry meat and egg production are less reliable than other livestock
data because such a large proportion of the birds are produced by individual farm
households, rather than in specialized operations (USDA, 1998d).
“Despite the uncertainties, however, there is no doubt that livestock product
markets in China are significant to world markets, and their importance is likely to
become much greater in the future” (USDA, 1998d).
59
CHAPTER 4
AN ECONOMETRIC MODEL OF U.S. CHICKEN EXPORTS
TO HONG KONG/CHINA
1. Theoretical Framework
1.1. General Trade Theory: Excess Supply and Excess Demand
The most important concepts in economics are market supply and demand. Excess
supply and excess demand are tools that simplify the analysis of international markets.
The difference between quantity supplied and quantity demanded at prices above the
autarky equilibrium price is called excess supply (ES). The difference between quantity
demanded and quantity supplied at prices below the autarky equilibrium price is called
excess demand (ED). Excess supply shows the quantity of a good a country wants to
export and excess demand shows the quantity of a good a country wants to import at
relevant prices. The interaction of international excess supply and excess demand
determines the quantity traded and the price of the traded good.
Figure 4.1 depicts an excess demand curve for good X for a country. The excess
demand curve for X is labeled Ex, which is much like a conventional demand curve,
except that the quantity demanded may be either positive or negative. A negative excess
demand is simply a desire to supply (export) the good to the world market at that price
ratio. At autarky price ratio Pa, there’s zero excess demand. Excess demand for X
becomes increasingly negative (exports of X becomes increasing positive) as the world
60
0
Pa
P*2
P*1
price ratio increases above Pa. Excess demand becomes increasingly positive (imports of
X become increasingly positive) as the world price ratio falls below Pa. (Markusen et al.
1995).
Figure 4.1. The Excess Demand for X
1.2. Excess Supply and Demand: One Product and Two Countries
Supply and demand curves can be used to show the gains from trade. Figure 4.2
shows trade between the U.S. and foreign countries, given the domestic demand and
supply curves in the U.S. and the rest of the world (ROW) taken as an aggregate entity.
The supply of U.S. exports is the amount by which domestic supply exceeds domestic
demand at all prices above the U.S. autarky price Pus, shown as the excess supply curve
ES in the middle panel of Figure 4.2. The demand for U.S. exports is the amount by
which foreign demand exceeds foreign supply at all prices below the ROW autarky price
Excess Demand
Price
Ex
61
Pr, shown as the excess demand curve ED. Export supply and demand intersect at an
equilibrium price Pe where qe is the quantity exported by the U.S. and imported by ROW.
The exports from the U.S. are qs – qd, the same quantity as qe, and foreign imports Qd –
Qs (Tweeten, 1992).
P
Q
P
Q
P
Q
The U.S. World Market HK/CH
S
D
ES
ED
S
D
0 0
VX
W Y
RPe
Pr
qd q qs Qs Q Qd
Figure 4.2. Supply and Demand Curves of One Product Between Two Trading Countries
Export markets raise the domestic price of the commodity in the U.S. to Pe from
the equilibrium price Pus in market isolation. The price Pe is lower than the market-
isolated price Pr in the foreign market. With trade, the gain in producer R + V+ X exceeds
the loss in consumer surplus R + V in the U.S. by the net social gain represented by the
triangle X in Figure 4.2. In the foreign market, the gain in consumer surplus W + Y
exceeds the loss in producer surplus w by the net social gain represented by the area Y.
Thus the public (made up of consumers and producers) in each trading area realizes a
positive net gain from trade (Tweeten, 1992).
62
1.3. Excess Supply and Demand: One Product and Three Countries
In the general discussion of trade theory with two countries and one product, it
was noted that the excess supply of a product is determined by product price and supply
and demand relationships in the exporting country, since HK/CH is only one of the
possible destinations for U.S. chicken part exports, we need to expand the two country
model to include two destination markets for U.S. chicken exports – Hong Kong/China
and the ROW. Figure 4.3 shows U.S. domestic demand and ROW excess demand in the
left panel. The U.S. excess supply of chicken to HK/CH is U.S. supply minus the sum of
U.S. domestic demand and ROW excess demand for U.S. chicken, as shown in the
middle panel of Figure 4.3.
In the left panel, U.S. domestic demand (DD) and ROW excess demand for U.S.
goods were aggregated horizontally to form a new demand curve, DDus + EDROW, which
is named total demand (TD). The kink on the TD curve implies that ROW will start
importing at prices lower than this point. In the right panel, HK/CH domestic supply (DS)
and ROW excess supply to HK/CH were aggregated to form a new supply curve named
total supply (TS). The kink on TS implies that ROW will start exporting to HK/CH at
prices higher than this point. Comparing Figure 4.3 with Figure 4.2, all the differences in
the middle panel are derived from the TD curve in the left panel and TS curve in the right
panel. Similar to the one good and two countries case, we derived the curve ED (HK/CH
excess demand for U.S. chicken parts) and ES (U.S. excess supply to HK/CH). Thus
HK/CH excess demand and supply not only depend on the supply, demand and prices in
U.S. and China markets, but are also related to the supply, demand and price in ROW.
63
P
Q
P
Q
P
QThe U.S. World Market HK/CH
S
DD
ES
ED
DS
D
TS
TD
qe0 0
Figure 4.3: Supply and Demand Curves of One Product Among Three Trading Countries
The following analysis will focus on two aspects of the market: the excess supply
of U.S. product to HK/CH, and the excess demand for U.S. frozen chicken parts in
HK/CH market. To analyze excess supply and demand, it is necessary to develop a model
incorporating the elements that could affect the supply/demand. The goal is to derive
supply and demand equations in which most of the relevant factors are included. Section
2 will present the development of the excess supply and demand equations.
2. Empirical Model
Four chicken products were analyzed in the empirical model. They are: frozen
chicken legs, frozen chicken wings, frozen chicken feet, and frozen chicken offal. As
indicated in Chapter 2, Hong Kong/China is the largest market for U.S. exports of these
chicken parts during the period 1997 - 2001. Hong Kong/China frozen chicken leg
64
quarter equations were not estimated in this analysis because Russia is the dominant
market for U.S. chicken leg quarters. U.S. leg quarter exports to Russia were over ten
times as great as those to Hong Kong/China during the period from 1997 – 2001.
However, before specifying factors affecting excess supply and demand in the relevant
countries, the joint product nature of the production of different chicken parts must be
considered.
2.1. Joint Production of Chicken Parts
As mentioned in Chapter 3, U.S. excess production of chicken parts may be
influenced by the domestic demand for chicken breast meat. According to the latest price
spread released from USDA, price per pound of chicken breast meat was more than twice
of the price of whole chicken during March to August 2002. Because chicken parts are
produced in fixed proportion per bird, more chicken feet, offal, legs, wings, etc. may be
produced than needed in the U.S. domestic market, and U.S. producers may have to find
foreign markets to clear these parts. In other words, some of the chicken parts would be
wasted if no other distribution channels were found. These low valued chicken parts
could be classified as “by-products” that are produced together with the “primary
product,” in this case, high priced chicken breast meat. We may call the market for by-
products the “residual market.”
The market for the highest valued primary products will have a greater influence
on production decisions than the residual markets for lower valued by-products. Hence,
the production of U.S. chicken parts is determined by production of whole birds which is
largely determined by domestic demand for chicken breast meat. Some markets for
65
residuals from primary chicken product have become well established over the years.
Before residual markets were developed, certain chicken parts (e.g. chicken feet, offal,
and so on) were wasted. They were sold as feedstuff, almost without any return to the
producers. Obviously, producers in the broiler industry have real interest in finding ways
to use as much of the chicken as possible. Hong Kong/China is by far the largest user of
these residual chicken parts. The estimation of the trade models that examine and test the
“by-product” and other hypotheses will be presented in Chapter 5.
2.2. General Form of Excess Supply and Excess Demand Functions
It is assumed that U.S. chicken meat is distributed to: the U.S., HK/CH, and
ROW. It is also assumed that chicken consumed in HK/CH is produced domestically,
imported from the U.S., or imported from ROW. Thus, the excess supply of frozen
chicken part j from U.S. to HK/CH, where j is one of the parts which is produced in fixed
proportion per bird, can be specified as a function of U.S. chickens produced and prices
of part j in alternate markets,
(4.1a) QsjUS-HK/CH, t = f(QUS, t, Pj
US, t, PjUS-HK/CH, t, Pj
US-ROW, t)
where
QsjUS-HK/CH, t = Quantity of U.S. frozen chicken part j exported to HK/CH in period t.
QUS, t = Number of chickens slaughtered in the U.S in period t.
PjUS, t = U.S. domestic price of chicken part j in period t.
PjUS-HK/CH, t = Value per unit of U.S. frozen chicken part j exported to HK/CH in period t.
66
PjUS-ROW, t = Value per unit of U.S. frozen chicken part j exported to ROW in period t.
The excess demand for U.S. frozen chicken part j in HK/CH is specified as a
function of own-price, HK/CH income, and prices of related goods (including part j from
other countries). Specifically,
(4.1b) QdjUS-HK/CH, t = f(Pj
US-HK/CH, t, PjHK/CH, t, Palt
HK/CH, t, IncomeHK/CH, t, PjROW-HK/CH, t )
where
QdjUS-HK/CH, t = Quantity of frozen chicken part j imported by HK/CH in period t.
PjUS-HK/CH, t = Price of U.S. frozen chicken part j imported by HK/CH in period t.
PjHK/CH, t = Price of chicken part j produced in Hong Kong/China in period t.
PaltHK/CH, t = Price of alternative meat product in Hong Kong/China market in period t.
IncomeHK/CH, t = Hong Kong/China income level in period t.
PjROW-HK/CH, t = Price of ROW frozen chicken part j imported by HK/CH in period t.
By definition, the excess supply of U.S. chicken part j exported to HK/CH in
period t equals the excess demand for HK/CH imports of U.S. chicken part j in period t.
QsjUS-HK/CH, t = Qdj
US-HK/CH , t = QjUS-HK/CH, t.
Usually, exchange rates are included in trade models. However, both the Hong
Kong dollar and the China RMB are pegged to the US dollar, and the exchange rates of
67
the Hong Kong dollar and China RMB to the U.S. dollar are almost fixed during the
study period. Because of the absence of variation in US to HK/CH exchange rates, these
exchange rates were not included in the model.
In this study, we have a set of ES and ED equations for each chicken part, and
there are four chicken parts of interest. In total, we have eight equations. The price and
quantity of chicken parts traded are to be determined jointly in the market. Therefore,
Pjus-HK/CH and Qj
us-HK/CH are the endogenous variables to be explained by the model.
The US chicken production, chicken prices in the U.S. and ROW, HK/CH
income, and prices of related goods in HK/CH, on the other hand, are exogenous
variables that affect the ES and ED of the chicken parts. In other words, the value of the
variables QUS, PUS, PjUS-ROW, IncomeHK/CH, Pj
HK/CH, PjROW-HK/CH, and Palt
HK/CH are assumed
to be completely determined outside the system under consideration.
3. Econometric Considerations
3.1. Simultaneous Equation System and Variables
A model is said to constitute a system of simultaneous equations if all the
relationships involved are needed for determining the value of at least one of the
endogenous variables included in the model. This implies that at least one of the
relationships includes more that one endogenous variable (Kmenta, 1986). In this study, a
simple model of the market for each chicken part involves an excess supply and an
excess demand equation. For instance, in the ES (4.1a) and ED (4.1b) equations for
chicken part j, QsjUS-HK/CH and Psj
US-HK/CH are endogenous variables. Note that both
68
equations are needed for determining the values of these two endogenous variables, so
that the system is one of the simultaneous equations.
The classification of variables as endogenous and exogenous is very important as
far as economic theory is concerned since a necessary condition for the completeness of
theory is that the number of endogenous variables is equal to the number of independent
equations in the system (Kmenta, 1986). In this study, there are two independent
equations, (4.1a) and (4.1b), and two endogenous variables, PjUS-HK/CH and Qj
US-HK/CH for
each chicken part, so that the system contains a total of eight independent equations and
eight endogenous variables. The system satisfies the necessary condition for the
completeness.
The definition of a simultaneous equation system can be given a rigorous
interpretation when an economic model has been specifically formulated as a set of well-
defined stochastic relationships, that is, when it has been turned into what is generally
called an econometric model. Typically, economic theory tells us which relations make
up the model, which variables are to be included in each of the relations, and what is the
sign of some of the partial derivatives. As a rule, economic theory has very little to say
about the functional form of the relations and the values of the parameters. In order to put
an economic model into the form of a testable proposition, it is necessary to specify the
functional form of the relations. The end result is an econometric model that is ready for
estimation or testing of hypotheses (Kmenta, 1986).
69
The econometric model representing these relations (4.1a) and (4.1b) can be
defined as:
(4.2a) ES: QjUS-HK/CH, t = a0 + a1Qj
US, t + a2PjUS-HK/CH, t + a3Pj
US, t + a4PjUS-ROW, t + ε1jt,
(4.2b) ED: PjUS-HK/CH, t = b0 + b1Qj
US-HK/CH, t + b2 PjHK/CH, t + b3 Palt
HK/CH, t
+ b4 incomeHK/CH, t + b5PjROW-HK/CH, t + ε2jt.
Where ED represents the inverse excess demand equation, a’s and b’s are
parameters, and ε’s are random disturbances. Each disturbance is characterized by the
assumptions of the classical normal linear regression model (Kmenta, 1986). The
assumptions on each disturbance εkt are:
εkt ~ i.i.d. (0, σkk), k=1, 2
E (εkt εks) = 0, t, s = 1, 2, … , T; t ≠ s.
Where σkk is the variance of εkt, and T is the number of observations.
Equations (4.2a) and (4.2b) are called the structural form of the model. They are
structural equations in the sense that they are derived from the economic theory and each
purports to describe a particular aspect of the economy.
In general, the structural form of the system of equations can be written in matrix
form (Kmenta, 1986) as:
(4.3) B yt + Γ xt = ut
70
where yt =
Gt
t
t
y
yy
M
2
1
, xt =
Kt
t
t
x
xx
M
2
1
, ut =
Gt
t
t
u
uu
M
2
1
,
B =
GGGG
G
G
βββ
ββββββ
L
MOMM
L
L
21
22221
11211
, and Γ =
KKKK
K
K
γγγ
γγγγγγ
L
MOMM
L
L
21
22221
11211
.
Where yt is a vector of endogenous variables, xt is a vector of exogenous
variables, ut is a vector of stochastic disturbances, and t = 1, 2, …, T. The βs and the γs
are known as the structural coefficients. There are G endogenous and K exogenous
variables in the system.
A matrix representation of all T observations is (Kmenta, 1986):
(4.4) Y B′ + X Γ′ = U,
where Y is a (T x G) matrix of observations on the G endogenous variables, X is a (T x
K) matrix of observations on the K exogenous variables, and U is a (T x G) matrix of the
values of the G disturbances.
With respect to the stochastic disturbances, we stipulate that each disturbance
satisfies the assumptions of the classical normal linear regression model, i.e.,
ugt ~ i.i.d. (0, σgg), g = 1, 2, …, G;
E (ugt ugs) = 0, t, s = 1, 2, … , T; t ≠ s.
71
However, we do not rule out the possibility that the disturbances are correlated across
equations, i.e. that
E (ugt uhs) = σgh, g, h = 1, 2, …, G;
The reduced form of the system is obtained by solving the structural form
equations for the values of the endogenous variables, that is, by expressing the Ys in
terms of the Xs and Us. Using matrix notation, we may write the reduce form as
(Kmenta, 1986):
(4.5) yt = П xt + vt,
where П =
GKGG
K
K
πππ
ππππππ
L
MOMM
L
L
21
22221
11211
, and vt =
Gt
t
t
v
vv
M
2
1
,
Where the πs represent the reduced form coefficients and the vs the reduced form
disturbances. In general, each reduced form disturbance is a linear function of all
structural disturbances.
The relationship between the structural form and the reduced form can be
described as (Kmenta, 1986):
(4.6) П = - B-1Γ, and
(4.7) vt = B-1ut.
72
In this study, the reduced form equations for each chicken part j showing
explicitly how the endogenous variables are jointly dependent on the exogenous variables
and the disturbances of the system can be expressed as:
(4.8a) QjUS-HK/CH, t = g1(Qj
US, t, PjUS, t, Pj
US-ROW, IncomeHK/CH, t, PjHK/CH, t, Pj
ROW-HK/CH, t,
PaltHK/CH, t) + ξ1t,
(4.8b) PjUS-HK/CH, t = g2(Qj
US, t, PjUS, t, Pj
US-ROW, t, IncomeHK/CH, t, PjHK/CH, t, Pj
ROW-HK/CH, t,
PaltHK/CH, t) + ξ2 t.
where ξ1t and ξ2t are the reduced form disturbances, which represent the linear
combination of all structural disturbances.
Because there are endogenous variables among the explanatory variables in
simultaneous equations, ordinary least squares (OLS) estimators of the structural
coefficients are not consistent, at least in general. However, the reduced from equations
are represented by the exogenous variables of the system, so that OLS estimators of the
reduced form coefficients are consistent. The question then is whether we can derive
estimates of the structural coefficients from the consistent estimates of the reduced form
coefficients. This problem is called the identification problem (Kmenta, 1986).
3.2. The Identification Problem
A necessary condition for identification of a given structural equation is that the
number of exogenous variables excluded from the given equation is at least as large as
the number of endogenous variables included in the equation less one This is called the
73
order condition for identifiability. Note that this is only a necessary and not a sufficient
condition for identification. The relation used in determining the identification status of
the equations (Kmenta, 1986) is:
(4.9) B П = - Γ.
To satisfy the sufficient condition for identification, another condition is needed, and it is
called the rank condition for identifiability (Kmenta, 1986). Specifically,
Rank (П∆**) = G∆ - 1,
where П∆** is a sub-matrix of П. The order and rank conditions enable us to set up the
following general rules for determining the identification status of a structural equation.
• If K** > G∆ - 1 and Rank (П∆**) = G∆ - 1, we have overidentification.
• If K** = G∆ - 1 and Rank (П∆**) = G∆ - 1, we have exact identification.
• If K** ≥ G∆ - 1 and Rank (П∆**) = G∆ - 1, the structural equation is
underidentified.
• If K** < G∆ - 1, the structural equation is underidentified.
Where
K** = number of exogenous variables excluded from the equation.
G∆ = number of endogenous variables that appear in the equation.
In this study, all the estimated ES and ED equations meet the order condition. Adding
that the rank condition is satisfied, the equations are overidentified (or exact identified).
74
3.3. Different Estimation Methods for System Equations
Economic models frequently involve a set of relationships designed to explain the
behavior of certain variables. In particular, when a relation is a part of a system, some
regressors are typically stochastic and correlated with the regression disturbance. In this
case, the OLS estimators of the regression coefficients are inconsistent and other methods
must be derived to provide consistent estimates (Kmenta, 1986). In estimating an
overidentified (or exactly identified) structural equation belonging to a general
interdependent system of equations, there are several methods leading to consistent
estimation that can be used. Probably the best-known single equation method is that of
two-stage least squares (2sls) (Kmenta, 1986).
The two-stage least squares estimator, although consistent, is in general not
asymptotically efficient. The reason for the lack of asymptotic efficiency is the disregard
of correlation of the disturbances across equations. An alternative explanation for the lack
of asymptotic efficiency is that single equation estimators do not take into account prior
restrictions on the other equations in the model. This parallels the situation in which a
regression equation belonging to a set of seemingly unrelated regressions (SUR) is
estimated by ordinary least squares method. If we do not take into account the correlation
between the disturbances of different structural equations, we are not using all the
available information about each equation and therefore, do not attain asymptotic
efficiency. This deficiency can be overcome, as in the case of seemingly unrelated
regressions, by estimating all equations of the system simultaneously. For this purpose,
we can use one of the so-called system methods, such as three-stage least squares (3sls)
75
estimation. Three-stage least squares is the simplest system method, which involves a
straightforward application of the Aitken generalized estimation (Aitken, 1934-35) to the
system of structural equations (Kmenta, 1986).
Regression of supply (or demand) functions for various commodities with
observations made over time is one of the typical cases where covariance represents links
between different equations. In this study, a system of ES and ED functions were
constructed for each chicken part. Suppose that we cannot rule out the possibility that the
regression disturbances in the eight different equations are mutually correlated. Its
variance-covariance matrix can be shown as:
E (εk εj) = σkj IT, k, j = 1, 2, … , 8; k ≠ j,
where IT is an identity matrix of order (T x T), σkj is the covariance of the disturbances of
the kth and jth equation, which is assumed to be constant over all observations. These
considerations led to a 3sls estimation method for system of equations in this study.
Generally, suppose the overidentified (or exact identified) structural equation is
the first equation of the system, such that
(4.10) y1 = Y1β1 + X1γ1 + u1, and Y1 = [y2, y3,…,yG∆],
where y1 is a (T x 1) vector of the endogenous variable whose coefficient in the first
equation is one, Y1 is a T x (G∆ - 1) matrix of the remaining endogenous variables in the
76
first equation, X1 is a (T x K*) matrix of the predetermined variables in the first equation,
and u1 is a (T x1) vector of the disturbances in this equation.
The two-stage least squares estimation process may be viewed as consisting of
two successive applications of the ordinary least squares method. In the first stage the
reduced form equations for y2, y3, … ,yG∆ are estimated, and the fitted values of these
variables are calculated. In the second stage, the least squares method is applied to (4.11)
where the fitted values of y2, y3, … ,yG∆ are used as explanatory variables (Kmenta,
1986).
(4.11) y1 = Y1(hat)β1 + X1γ1 + u1*
where Y1(hat) is the vector of fitted values of y2, y3, … ,yG∆.
In the case of three-stage least square (3sls) estimation, Aiken generalized
estimation is applied straightforwardly to the system of structural equations. The system
can be rewritten as
(4.12) y1 = Y1(hat) β1 + X1 γ1 + u1*
y2 = Y2(hat) β2 + X2 γ2 + u2*
…
yG = YG(hat) βG + XG γG + uG*
Where yg is a (T x 1) vector of the endogenous variable in the gth equation, which is to be
estimated by the model. Yg(hat) is a T x (Gg∆ - 1) matrix of the remaining endogenous
77
variables in the gth equation, Xg is a (T x Kg*) matrix of the predetermined variables in
the gth equation, and ug* is a (T x1) vector of the disturbances in the gth equation.
The underlying idea of this Aiken generalized estimation in (4.12) is to take into
account the correlation of the disturbances across equations by treating (4.12) as a set of
seemingly unrelated equations (Kmenta, 1986). Under the assumptions stated at the
beginning of this section, the three-stage least squares estimates of the structural
coefficients are consistent and asymptotically efficient. The exactly identified equations
add no information that is relevant for estimation of the overidentified equations of the
system (Kmenta, 1986).
It should be noted that the residuals from the estimated three-stage least squares
equations can be used to obtain new estimates of the variances and covariances of the
structural disturbances. These can then replace the previous estimates in the three-stage
least squares formula, thus leading to new estimates of the structural coefficients. The
process could be repeated until there is no change in the estimated structural coefficients.
The resulting estimates, know as iterative three-stage least squares (i3sls) estimates, have
the same asymptotic properties as the ordinary three-stage least squares estimates
(Kmenta, 1986).
In this study, we used three-stage least squares (3sls) estimation method for
parameter estimations based on the following reasons:
• Since price and quantity are jointly endogenous variables, both supply and
demand equations are necessary to adequately describe the observed values. A critical
assumption of OLS is that the regressors are uncorrelated with the residual. When current
endogenous variables appear as regressors in other equations (endogenous variables
78
depend on each other), this assumption is violated and the OLS parameter estimates are
biased and inconsistent. It is referred to as simultaneous equation bias. Neither the
demand nor supply equation can be estimated consistently by OLS.
• Regression of supply (or demand) functions for various commodities based on
time series observations is one of the typical cases where covariance represents links
between different equations, and an instrumental method such as 3sls or SUR is needed
to overcome the simultaneous equation bias.
4. Hypotheses
In this study, we want to find out:
• Does the quantity of U.S. chicken part j exports to HK/CH respond to its own
export price?
That is, do the U.S. poultry producers determine their chicken parts export
quantity based on the export price, or do they send these chicken excess parts to HK/CH
market just to get rid of these products because there is no domestic market for these
chicken parts?
• Does U.S. whole chicken production level positively affect the quantity of
U.S. chicken parts exported to HK/CH?
As previously stated, because these chicken parts are produced in fixed
proportions, we suspect that more chicken feet, offal, legs, wings, etc. may be produced
than needed in the U.S. domestic market. If the U.S. chicken parts export quantities do
respond positively to U.S. production, but not to their own export prices, it may suggest
that HK/CH is a residual market.
79
• Do U.S. exporters take into account of the prices of U.S. chicken part j in
alternative markets (e.g., prices in U.S. domestic and ROW markets) to
determine the quantity of U.S. chicken part j exported to HK/CH?
• Is the price of U.S. chicken part j exported to HK/CH negatively affected by
its own export quantity?
• Are the prices of U.S. chicken parts exported to HK/CH positively affected by
HK/CH income level?
• Are the prices of U.S. chicken parts exported to HK/CH impacted by the price
of alternative products, or HK/CH import prices from ROW?
80
CHAPTER 5
ESTIMATED MODELS, DATA, AND RESULTS
1. Estimated Models
The system model was estimated using several functional forms to examine the
robustness of the estimates, and four model specifications were estimated in this study.
Each of these specifications studied the excess supply and demand for all the four
chicken products: chicken feet, wings, legs and offal. These model specifications are
presented in sections 1.2 – 1.5. The estimates of structural parameters of each
specification were obtained by estimating these eight equations simultaneously, except
for specification 3, where parameters were estimated for each chicken part separately.
The empirical models estimated are different from the theoretical model (4.2a and 4.2b)
proposed in Chapter 4. Modifications of the theoretical model are discussed in the
following section.
1.1. Model Modifications
1.1.1. Uniqueness of the Market and Data Availability
In the ES equations for chicken feet and chicken offal, the U.S. price, Pjus, was not
included as an explanatory variable. There is no market in the U.S. for chicken feet and
offal consumption and therefore no domestic prices are reported for these chicken parts.
Furthermore, monthly data for, Pjus, U.S. domestic price of frozen legs and wings are
81
unavailable. Instead of omitting these variables, we used data representing U.S. chicken
leg (North East) prices, and chicken wing (North East) prices as proxies.
In the ED equations, the variable, PjHK/CH, price of chicken parts produced in
HK/CH was not included because the monthly data were not available. The Hong Kong
Composite Consumer Price Index for live poultry, PHK_live, was used as a proxy for
PaltHK/CH. This price information was only available for the Hong Kong market, but
commodity prices in Hong Kong and Mainland China markets are closely related.
The price of HK/CH imports from ROW (PjROW-HK/CH) should also be an
important factor that affects HK/CH demand for U.S. chicken, but these data were not
available. In order to account for the impact of HK/CH imports from non-U.S. sources on
the HK/CH demand for U.S. chicken, we included an alternative variable, QBrazil, which
is the quantity of Brazil chicken product exports to the whole world. We chose QBrazil
because Brazil is a major exporter to HK/CH, but monthly bilateral data on Brazil –
HK/CH trade were unavailable. Hong Kong/China income data, IncomeHK/CH, are also
unavailable, so Hong Kong GDP, GDPhk, was used as a proxy for HK/CH income.
1.1.2. Possible Data Problem
It was noticed that U.S.-HK/CH chicken export data changed dramatically since
January 2000. The most apparent changes are the quantity of “other” chicken parts was
only half of the volume before January 2000, and the quantity of chicken offal was ten
times as large as before. We suspect that the changes on the quantity of different chicken
parts exports were caused by the changes on the classification of chicken parts. Thus, we
added the dummy variable, d_y2, with the value 0 for the observations of year 1997-
82
1999, and 1 for the year 2000. Because the magnitude of the data problem was related to
the data of export quantity of “other” chicken part, an interaction term, D1, was defined
by multiplying QothersUS-HK/CH with the dummy variable d_y2. D1 was added to the ES and
ED equations as an adjustment term.
1.1.3. Other Model Modifications
In one of the alternative model specifications, the ES equations were defined
without prices as explanatory variables, because we suspect that the U.S. treats HK/CH as
a place to dispose of surplus chicken parts, and the quantity exported is not responsive to
prices.
Note that a variable representing Chinese chicken production should be in the ED
model, but it is omitted from the empirical specification. As discussed in Chapter 3, the
annual Chinese production data may not be reliable and monthly Chinese poultry
production data are also unavailable. Although China has steadily increased their
production, its per capita consumption level is still very low, and demand for U.S.
imports may be largely unaffected by Chinese production at recent production levels.
Also, the exported products from the U.S. do not compete directly with China’s domestic
supply due to Chinese consumption habits. More than 70 percent of U.S. chicken
products exported to China are chicken feet, offal, wingtips and gizzards, and Chinese
domestic producers cannot satisfy the demand for these chicken parts without imports.
Leaving out Chinese chicken production ia not expected to result in serious bias in the
estimates.
83
The variable, Qleg quarterUS-HK/CH (Qleg qrt
US-HK/CH), was added to the ED equations in
order to capture the influence of leg quarter imports on the demand for other chicken
parts. This variable was treated as an exogenous variable in estimation because the
quantity of chicken leg quarters shipped to HK/CH appears to be largely determined by
the quantity of U.S. leg quarter shipped to Russia. Russia dominates the market for U.S.
leg quarters. The amount of U.S. leg quarter shipments to HK/CH became significant
only for a brief period, largely associated with Russia’s economic difficulties and a steep
devaluation of the Ruble.
1.2. Model Specifications
Several different approaches were employed to specify the ES equations for
empirical estimation. Specifically, linear price, price ratio, and no price approaches were
examined in this study. Each of these approaches related to the specification of the price
variables used in the empirical implementation of the econometric models will be
discussed in the following sections.
1.2.1. Linear Price Approach (Specification 1)
In the linear price approach, the supply of exports is specified as a function of
U.S. chicken production, the HK/CH export price, U.S. price, ROW export price, and an
adjustment term, D1. The equation for the excess supply of U.S. frozen chicken part j
was specified as:
(5.1a) QjUS-HK/CH = a0 + a1 QUS + a2 Pj
US-HK/CH + a3 PjUS+ a4 Pj
US-ROW +a5 D1 + ε1jt.
84
Equation (5.1a) embodies the hypothesis that exports to HK/CH are posited to rise when
there’s an increase in the U.S. production. In addition, as the price of HK/CH exports
rises, exports to HK/CH become more profitable and, hence, exporters will supply more.
As the price in U.S. or the price of exports to ROW rise, exports to HK/CH become
relatively less profitable and, hence, exporters will supply less. We, therefore, expect a1
and a2 to be positive in the results, and a3 and a4 to be negative.
The Hong Kong/China inverse excess demand equation was specified as:
(5.1b) PjUS-HK/CH = b0 + b1 Qj
US-HK/CH+ b2 Qleg quarterUS-HK/CH + b3 PHK_live + b4 GDPHK
+ b5 QBrazil + b6 D1 + ε2jt,
where j = chicken feet, chicken wings, chicken leg, and chicken offal, and
ε1jt, ε2jt = disturbance terms.
The εts were assumed to satisfy the assumptions of the classical normal linear regression
model.
Equation (5.1b) embodies the hypothesis that as the quantity of HK/CH imports
rises, prices of the imports will become lower in order to clear the HK/CH market. In
addition, import prices are posited to rise, when there is an increase in the Hong Kong
GDP. We therefore expect b1 to be negative and b4 to be positive in the results. Since Qleg
quarterUS-HK/CH and QBrazil represent quantities of substitutes for frozen imported parts from
the U.S. We expect b2 and b5 to be negative. Since PHK_live represents the price of a
substitute for U.S. frozen chicken parts, we expect b3 to be positive. ES equations (5.1a)
85
and ED equations (5.1b) comprised the system model for specification 1. The
endogenous variables in ES and ED system models are: QjUS-HK/CH and Pj
US-HK/CH, and the
exogenous variables are: QUS, PjUS, Pj
US-ROW, Qleg quarterUS-HK/CH, PHK_live, GDPHK, QBrazil,
and D1.
1.2.2. Price Ratio Approach (Specifications 2 and 3)
The differences between the price ratio approach and the linear price approach lie
on the specification of the ES equations. In this approach, the relative prices instead of
the linear prices were used in model specification. Two versions of the price ratio
approach are examined in this study.
1.2.2.1.Specification 2
The supply of exports is specified as a function of U.S. chicken production, price
of U.S. exports to HK/CH, the relative prices of exports (i.e., the ratio of the U.S.
domestic price to the HK/CH export price, and the ratio of the ROW export price to the
HK/CH export price), and an adjustment term, D1. The equation for the excess supply of
U.S. frozen chicken part j was specified as:
(5.2a) QjUS-HK/CH = c0 + c1 QUS + c2 Pj
US-HK/CH + c3 PjUS/Pj
US-HK/CH+ c4 PjUS-ROW/Pj
US-HK/CH
+c5 D1 + ε3jt.
Equation (5.2a) postulates that as the price of HK/CH exports rises relative to domestic
price or ROW price, exports to HK/CH become more profitable and, hence, exporters
86
will supply more. In addition, exports are posited to rise, when there is an increase in the
U.S. production. We therefore expect the signs to be positive on c1 and c2, and negative
on c3 and c4.
The Hong Kong/China inverse excess demand equation was specified as:
(5.2b) PjUS-HK/CH= d0 + d1 Qj
US-HK/CH+ d2 Qleg quarterUS-HK/CH + d3 PHK_live + d4 GDPHK
+ d5 QBrazil + d6D1 + ε4jt.
The ED equation (5.2b) is the same as that in specification 1. Equations (5.2a) and
(5.2b) comprise the system model of specification 2. The setting of endogenous variables
and exogenous variables for specification 2 is the same as that in specification 1.
Note that the excess supply equations in specification 2 are nonlinear in variables.
These nonlinear variables are price ratios PUS/PjUS-HK/CH and Pj
US-ROW/PjUS-HK/CH. We need
a method that can estimate simultaneous models with nonlinear equation. Computing
parameter estimates for nonlinear equations requires an iterative process. Here we used
i3sls (iterated three-stage least squares) estimation method. Starting with an initial value
for the parameter values, nonlinear estimation method (e.g., i3sls) tries different
parameter values until the objective function of the estimation method is minimized. This
process does not always succeed (i.e., the nonlinear estimation does not always
converge).
In specification 2, each set of ES and ED equations for a chicken part was
estimated separately, to reduce the convergence problem. Initially, all 8 equations were
estimated simultaneously, but the i3sls estimation did not converge.
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1.2.2.2.Specification 3
Specification 3 is similar to specification 2 in that they have the same appearance
of excess supply and demand equations, but the model of specification 3 is estimated in
another way. Although the price ratios PjUS / Pj
US-HKCH and PjUS-ROW / Pj
US-HKCH are still
involved in the ES equations, these price ratios were calculated before estimation and
were treated as predetermined. Thus, specification 3 is estimated by 3sls instead of i3sls.
This is the only difference between specifications 2 and 3.
The endogenous variables in this system model are: QjUS-HK/CH and Pj
US-HK/CH. The
exogenous variables are: QUS, PjUS, Pj
US-ROW, Qleg quarterUS-HK/CH, PHK_live, GDPHK, QBrazil,
and D1. We also take the price ratio PjUS/Pj
US-HKCH and PjUS-ROW/Pj
US-HKCH as
predetermined.
1.2.3. No Price Approach (Specification 4)
We wanted to investigate the notion that the U.S. treats HK/CH as a place to
dispose of surplus chicken parts. Thus the quantity exported would not be responsive to
prices. Therefore, we added one more specification which has no prices in the ES
equations. In the absence of PjUS-HKCH, Pj
US and PjUS-ROW in the ES equation, the supply of
exports is specified as a function of the U.S. chicken production and an adjustment term
of D1. The equation for the excess supply of U.S. frozen chicken part j was specified as:
(5.3a) QjUS-HK/CH = e0 + e1 QUS + e2 D1 + ε5t.
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We assume HK/CH exports are to rise when there is an increase in the U.S. production.
Therefore, a positive e1 coefficient is expected. The excess demand for U.S. chicken part
j is specified in the same way as in specifications 1, 2, and 3. The endogenous variables
in this ES and ED system model are: QjUS-HK/CH and Pj
US-HK/CH. The exogenous variables
are: QUS, PjUS, Pj
US-ROW, Qleg quarterUS-HK/CH, PHK_live, GDPHK, QBrazil, and D1. The 3sls
estimation method was applied on this specification. The estimation results of these
model specifications are presented in section 4. A summary of the variables used in the
various specifications of the econometric model is presented in Table 5.1.
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Table 5.1. Variable Definitions Variable Definition Qleg
US-HK/CH Quantity of the U.S. domestic exportsa of frozen chicken legs to Hong Kong/China. (In 1,000 MT)
QwingUS-HK/CH Quantity of the U.S. domestic exportsa of frozen chicken wings to
Hong Kong/China. (In 1,000 MT) Qfeet
US-HK/CH Quantity of the U.S. domestic exportsa of frozen chicken feet to Hong Kong/China. (In 1,000 MT)
QoffalUS-HK/CH Quantity of the U.S. domestic exportsa of frozen chicken offal to Hong
Kong/China. (In 1,000 MT) Qother
US-HK/CH Quantity of the U.S. domestic exportsa of other frozen chicken partsd to Hong Kong/China. (In 1,000 MT)
PlegUS-HK/CH Priceb of the U.S. domestic exportsa of frozen chicken legs to Hong
Kong/China. (U.S. dollar/Kg) Pwing
US-HK/CH Priceb of the U.S. domestic exportsa of frozen chicken wings to Hong Kong/China. (U.S. dollar/Kg)
PfeetUS-HK/CH Priceb of the U.S. domestic exportsa of frozen chicken feet to Hong
Kong/China. (U.S. dollar/Kg) Poffal
US-HK/CH Priceb of the U.S. domestic exportsa of frozen chicken offal to Hong Kong/China. (U.S. dollar/Kg)
PotherUS-HK/CH Priceb of the U.S. domestic exportsa of other frozen chicken partsd to
Hong Kong/China. (U.S. dollar/Kg) QUS Number of total chicken slaughtered in U.S. Plegus US chicken leg domestic (North East) price (cents/pound)
Pwingus US chicken wing domestic (North East) price (cents/pound)
Qleg qrt
US-HK/CH Quantity of the U.S. domestic exportsa of frozen chicken leg quarters to Hong Kong/China. (In 1,000 MT)
PHK_live Hong Kong live poultry Composite Consumer Price Index (Oct. 1999-Sep. 2000=100)
GDPHK Hong Kong Seasonal Gross Domestic Product (HK$ million) QBrazil Brazil chicken product exports to the whole world.
d_y2 Dummy variable, with the value equals to 1 for the year 2000, and
equals to 0 otherwise. D1 Interaction term of d_y2 and Qother
US-HK/CH.
Note: a. Domestic Exports: Exports of domestic merchandise include commodities which
are grown, produced, or manufactured in the United States, and commodities of foreign origin which have been changed in the United States, including U.S. Foreign Trade Zones, from the form in which they were imported, or which have been enhanced in value by further manufacture in the United States. (Source: ATPA 1999 Appendix B, Bureau of International Labor Affairs/US department of Labor)
90
b. Price: FASc domestic exports value / domestic exports quantity (Source: USITC web data)
c. FAS Export Value: FAS (Free Alongside Ship) value is the value of exports at the U.S. port, based on the transaction price, including inland freight, insurance, and other charges. The value excludes the cost of loading the merchandise aboard the carrier and also excludes any further costs.
d. Other frozen chicken parts: frozen chicken parts excluding chicken leg quarters, chicken legs, chicken wings, chicken feet, chicken offal. Exports commodity information was collected in terms of the commodity classifications in the Schedule B, Statistical Classification of Domestic and Foreign Commodities Exported from the United States. Schedule B is a U.S. Bureau of the Census publication and is based on the Harmonized Commodity Description and Coding System (Harmonized System). (Source: ATPA 1999 Appendix B, Bureau of International Labor Affairs/US department of Labor)
2. Data
The models in this study employed monthly data from January 1997 through
December 2000. Trade data for the empirical model were obtained from the United States
International Trade Commission. U.S. chicken meat production and U.S. domestic price
data are obtained from Poultry Yearbook, USDA. U.S. chicken parts price data are from
“Economic Time Series Page”, www.economagic.com. Hong Kong live chicken price
and Hong Kong GDP data are from Census & Statistics Department, Hong Kong SAR
Government. Brazil export data are obtained from the Brazilian Poultry Exporters
Association website: http://www.abef.com.br/.
As to the USITC data, its disclaimer (http://dataweb.usitc.gov/disclamer.html)
implies their data may not be accurate. We used d_y2 and QotherUS-HK/CH in the
econometric models to adjust the apparent USITC data problem for the year 2000. It was
also noticed that the last two observations (November and December 2000) of U.S.
chicken wings exported to ROW have apparent data recording errors. For example, in
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December 2000, the value of chicken wings exported to 17 of the ROW countries were
exactly of the same value, $10.407 million. These two observations were deleted from
the data sample. Because of the similar data problem, we also deleted the first
observation of January 1997. Thus, the total observations in this study are 45. A 3-month
moving average smoothing method was applied to the original data to reduce some of the
abrupt monthly fluctuations in the data.
3. Results
3.1. Overview of Estimation Results
In general, the ED results were much more robust across specifications with more
significant coefficients of expected signs. ES results were more variable across
specifications with more insignificant coefficients or coefficients with unexpected signs
(Tables 5.2-5.5).
In the following discussion, we will focus primarily on those estimated parameters which
are significantly different from zero at the 10 percent level.
The excess supply estimation generally yielded significant coefficient estimates
for U.S. chicken production (QUS) with the expected positive signs, and with the strongest
relationships for chicken feet (Table 5.2) and chicken offal (Table 5.5). This implies that
U.S. production played an important role in determining the quantity of these chicken
parts supplied to Hong Kong/China, especially for the lower-valued products. The more
whole chicken the U.S. produces, the more chicken parts are exported to HK/CH.
Results for the inverse excess demand equations are generally consistent across
specifications. The estimation results indicate that import prices are responsive to the
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import quantities, except for chicken offal (Table 5.5). The coefficients of HK/CH import
quantity are all negative and significantly different from zero at the 5 percent level
(except for chicken offal), revealing that lower import prices are associated with higher
quantities of U.S. exports. HK/CH prices of these four chicken parts imports are
negatively related to the quantity of HK/CH chicken leg quarter imports (Tables 5.2-5.5),
which is determined by Russia’s leg quarter imports from the U.S. This suggests that leg
quarter imports diverted from Russia significantly influenced HK/CH chicken parts
import prices.
The Hong Kong GDP coefficient estimates are positive and mostly significantly
different from zero at 5 percent level, except for chicken offal. The result suggests that
HK/CH consumers demand more U.S. chicken parts as their income increases. The
coefficients for Hong Kong consumer price index for live poultry are mostly negative and
significantly different from zero at the 5 percent level for chicken feet (Table 5.2) and
wings (Table 5.3). These results do not seem to support the contention that chicken feet
and wings are substitute products for live poultry in Hong Kong.
Overall, the results suggest that the changes in the exports of U.S. frozen chicken
parts to HK/CH are attributable to changes in U.S. chicken production. Furthermore,
prices of these exports are negatively impacted by the quantity exported and the diversion
of leg quarters from Russia to HK/CH, and positively impacted by income increases in
Hong Kong.
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Table 5.2. Estimation Results for U.S. Chicken Feet Exports to HK/CH
Variable Linear Prices Relative Pricesa (i3sls)
Relative Pricesa (3sls) b No Prices
Excess Supply: QfeetUS-HK/CH
Constant -1.174 (11.249)
-25.061* (13.859)
-7.937 (11.762)
-26.029** (10.290)
QUS 31.414** (15.569)
54.538** (18.180)
35.414** (15.940)
55.942** (15.267)
PfeetUS-HK/CH -16.993**
(3.781) -0.583 (5.925)
-11.140** (3.791) ---
PfeetUS ---
--- --- ---
PfeetROW 1.390*
(0.711) 0.221
(0.816) 0.997** (0.423) ---
D1 0.354** (0.090)
0.341** (0.098)
0.377** (0.090)
0.338** (0.092)
Adj-R2 0.604 --- 0.600 0.598 Excess Demand: Pfeet
US-HK/CH
Constant 0.798** (0.205)
0.680** (0.247)
0.783** (0.210)
0.695* (0.250)
QfeetUS-HK/CH -0.020**
(0.003) -0.018** (0.006)
-0.020** (0.003)
-0.017** (0.006)
Qleg qrtUS-HK/CH -0.007**
(0.002) -0.007** (0.002)
-0.007** (0.002)
-0.007** (0.002)
PHK_live -0.004** (0.001)
-0.004** (0.001)
-0.004** (0.001)
-0.004** (0.001)
GDPHK 1.537** (0.428)
1.954** (0.567)
1.634** (0.442)
1.792** (0.600)
QBrazil -0.001 (0.000)
-0.001 (0.001)
-0.001 (0.000)
-0.001 (0.001)
D1 0.007** (0.002)
0.007** (0.003)
0.007** (0.002)
0.005 (0.003)
Adj-R2 0.808 --- 0.807 0.784 a PUS and PROW represent US and ROW price relative to US-HKCH own-price, respectively. b Price ratios calculated before estimation, linear estimation used. c R2 s were calculated at the 2sls stage. *significant at the 10 percent level, ** significant at the 5 percent level. Numbers in parentheses are standard errors of the estimated parameters.
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Table 5.3. Estimation Results for U.S. Chicken Wing Exports to HK/CH
Variable Linear Prices Relative Pricesa (i3sls)
Relative Pricesa (3sls) b No Prices
Excess Supply: QwingUS-HK/CH
Constant -0.907 (8.219) N/A1 -4.066
(9.778) -0.264 (6.156)
QUS 7.854 (10.205) N/A1 11.452
(10.729) 7.479
(9.133)
PwingUS-HK/CH -0.295
(2.265) N/A1 0.193 (3.219) ---
PwingUS -0.002
(0.029) N/A1 0.010 (0.020) ---
PwingROW 0.372
(1.065) N/A1 -0.003 (0.735) ---
D1 0.156** (0.057) N/A1 0.144**
(0.057) 0.145** (0.055)
Adj-R2 c 0.289 --- 0.291 0.241 Excess Demand: Pwing
US-HK/CH
Constant 1.353** (0.429) N/A1 1.343**
(0.444) 0.896
(0.607)
QwingUS-HK/CH -0.068**
(0.013) N/A1 -0.074** (0.012)
-0.092* (0.046)
Qleg qrtUS-HK/CH 0.023**
(0.003) N/A1 -0.024** (0.003)
-0.021** (0.004)
PHK_live -0.006** (0.002) N/A1 -0.006**
(0.002) -0.005 (0.003)
GDPHK 1.858** (0.865) N/A1 1.869**
(0.907) 3.065** (1.316)
QBrazil -0.002** (0.001) N/A1 -0.001
(0.001) -0.001 (0.002)
D1 0.018** (0.005) N/A1 0.017**
(0.005) 0.018** (0.007)
Adj-R2 c 0.650 --- 0.650 0.621 a PUS and PROW represent US and ROW price relative to US-HKCH own-price, respectively. b Price ratios calculated before estimation, linear estimation used. c R2 s were calculated at the 2sls stage. *significant at the 10 percent level, ** significant at the 5 percent level. Numbers in parentheses are standard errors of the estimated parameters. 1: Estimation didn’t converge.
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Table 5.4. Estimation Results for U.S. Chicken Leg Exports to HK/CH
Variable Linear Prices Relative Pricesa (i3sls)
Relative Pricesa (3sls) b No Prices
Excess Supply: QlegUS-HK/CH
Constant 0.817 (4.034) N/A1 -4.945
(4.873) -11.229**
(5.494)
QUS 9.493 (5.659) N/A1 11.433*
(6.296) 23.363** (8.151)
PlegUS-HK/CH -9.857**
(1.313) N/A1 -3.060** (1.046) ---
PlegUS 0.054**
(0.023) N/A1 0.035** (0.014) ---
PlegROW 2.513**
(0.626) N/A1 1.613** (0.462) ---
D1 0.082* (0.042) N/A1 0.086*
(0.043) 0.059
(0.049) Adj-R2 c 0.450 --- 0.430 0.307
Excess Demand: PletUS-HK/CH
Constant 0.470 (0.404) N/A1 0.610
(0.444) 0.205
(0.851)
QlegUS-HK/CH -0.099**
(0.014) N/A1 -0.096** (0.013)
-0.092** (0.032)
Qleg qrtUS-HK/CH -0.012**
(0.003) N/A1 -0.014** (0.004)
-0.012* (0.007)
PHK_live -0.002 (0.002) N/A1 -0.002
(0.002) -0.001 (0.003)
GDPHK 2.854** (0.872) N/A1 2.529**
(0.974) 3.321
(1.987)
QBrazil 0.000
(0.001) N/A1 0.001 (0.001)
0.002 (0.002)
D1 0.003 (0.005) N/A1 0.002
(0.005) -0.004 (0.007)
Adj-R2 c 0.626 --- 0.632 0.603 a PUS and PROW represent US and ROW price relative to US-HKCH own-price, respectively. b Price ratios calculated before estimation, linear estimation used. c R2 s were calculated at the 2sls stage. *significant at the 10 percent level, ** significant at the 5 percent level. Numbers in parentheses are standard errors of the estimated parameters. 1: Estimation didn’t converge.
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Table 5.5. Estimation Results for U.S. Chicken Offal Exports to HK/CH
Variable Linear Prices Relative Pricesa (i3sls)
Relative Pricesa (3sls) b No Prices
Excess Supply: QoffalUS-HK/CH
Constant -24.212** (10.431)
-28.512** (11.786)
-28.358** (9.592)
-34.166** (9.297)
QUS 32.826** (14.572)
40.032** (15.649)
32.227** (13.607)
52.300** (13.793)
PoffalUS-HK/CH -1.138
(2.388) 0.566
(3.302) 4.262* (2.487) ---
PoffalUS ---
--- --- ---
PoffalROW 8.866**
(1.927) 3.635** (1.336)
7.242* (1.365) ---
D1 0.749** (0.088)
0.758** (0.098)
0.656** (0.088)
0.913** (0.083)
Adj-R2 c 0.891 --- 0.901 0.868 Excess Demand: Poffal
US-HK/CH
Constant 1.720** (0.640)
2.015** (0.729)
2.122** (0.587)
2.019** (0.883)
QoffalUS-HK/CH 0.015
(0.012) -0.004 (0.023)
0.002 (0.011)
-0.026 (0.033)
Qleg qrtUS-HK/CH -0.028**
(0.004) -0.025** (0.004)
-0.028** (0.004)
-0.022** (0.004)
PHK_live 0.001
(0.003) -0.001 (0.004)
-0.002 (0.003)
-0.002 (0.004)
GDPHK -2.319* (1.304)
-2.776* (1.513)
-2.943** (1.200)
-2.845 (1.823)
QBrazil -0.003 (0.002)
-0.003 (0.003)
-0.002 (0.002)
-0.000 (0.004)
D1 -0.011 (0.008)
0.006 (0.012)
-0.006 (0.008)
0.016 (0.017)
Adj-R2 c 0.654 --- 0.663 0.482 a PUS and PROW represent US and ROW price relative to US-HKCH own-price, respectively. b Price ratios calculated before estimation, linear estimation used. c R2 s were calculated at the 2sls stage. *significant at the 10 percent level, ** significant at the 5 percent level. Numbers in parentheses are standard errors of the estimated parameters.
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3.2. Comparison of Results from Different Specifications
On theoretical grounds, the first three specifications are less restrictive in that they
include prices or relative prices in the models. In specification 1, linear prices were
included in ES equations. In specifications 2 and 3, price ratios were incorporated in ES
equations.
In terms of goodness-of-fit, the specifications which include prices in ES
equations seem to perform better, as the system weighted R2s for specifications 1 and 3
are higher than that for specification 4, which has no prices in its ES equations. By
comparing the adjusted R2s which were calculated for each ES and ED equation from the
intermediate stage, 2sls estimation, we note that the values of adjusted R2s in
specification 4 were relatively close to those calculated for specifications 1 and 3 in many
cases.
As far as the estimation results are concerned, the three specifications with prices
in the ES equations generated more coefficient estimates with unexpected signs. For
instance, specification 1 contains the price of HK/CH exports, U.S. domestic price and
ROW price (PjUS-HK/CH, Pj
US, and PjROW) in its ES equations. We expected the coefficient
estimates for PjUS-HK/CH to be positive, and those for Pj
US, and PjROW to be negative.
However, the estimation results often did not give significant estimates with expected
signs for the coefficients including price and relative prices. On the other hand,
specification 4 is more parsimonious and it generated fewer inconsistent or unexpected
coefficient estimates.
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3.3. Results for Different Chicken Parts
Results vary for different chicken parts, and these differences may provide
insights into Hong Kong/China chicken imports. As pointed out in the previous section,
the performance of QUS (U.S. whole chicken production) is in accordance with the
theory, with the coefficient estimates all being positive for every chicken part. For
chicken feet (Table 5.2) and chicken offal (Table 5.5), the estimates of QUS are positive
and significantly different from zero at the 5 percent level across all four specifications.
This strongly suggests that U.S. chicken feet and offal exports are significantly
influenced by U.S. whole chicken production. Although QUS coefficient estimates for
chicken wings (Table 5.3) and legs (Table 5.4) are all positive, they didn’t show as strong
positive relationships as those for chicken feet and offal. None of the coefficient
estimates for QUS for chicken wing are significantly different from zero at the 10 percent
level. For chicken legs, QUS coefficient estimates were positive and significantly different
from zero at 10 percent level only for specifications 3 and 4.
We did not find the expected positive relationships between export quantity (QjUS-
HK/CH) and export price (PjUS-HK/CH) in excess supply equations, except for chicken offal
(Table 5.5), which has a positive sign in specification 3 at the10 percent significance
level. On the contrary, the coefficient estimate of PjUS-HK/CH was found negative for
chicken feet (Table 5.2) and chicken legs (Table 5.4), with estimates significantly
different from zero at the 5 percent level across specifications. The coefficient estimates
of export price for chicken wings (Table 5.3) were not significant at 10 percent level.
These unexpected results indicate that U.S.-HK/CH parts prices did not positively affect
the volume of exports. Our estimates indicate either the absence of a significant impact of
99
own-price on U.S. supply, or a negative impact, depending on the part and the
specification. No theoretical rational for the estimated negative relationship between
own-price and quantity in the ES equations for feet and legs is obvious. There was a
strong negative correlation between price and quantity of U.S. chicken exports to HK/CH
during the data period, and the estimated equations generally did not isolate a positive
own-price supply response embedded in that relationship.
The U.S. parts price was only available for wings and legs, and was hypothesized
to have a negative impact on ES to HK/CH. The only significant coefficients for Pus
were for specifications 1 and 3 for the legs equation, and the sign of these coefficients
were different from what was expected (Table 5.4). The estimates of PjROW were
significant and positive for chicken offal (Table 5.5), legs (Table 5.4) and feet (Table 5.2)
in contrary to our expectations. In this study, PjROW was assumed to be exogenous, and to
affect the U.S. export quantity to HK/CH. However, this strong positive relationship may
be explained by the dominance of HK/CH in the export market for these chicken parts
(especially for chicken offal and feet). A higher ROW price may be caused by increasing
the supply to the HK/CH market. The fact is in the year 2000 nearly all the U.S. frozen
chicken feet exports, about 73 percent of U.S. frozen chicken offal exports and about half
of U.S. frozen chicken legs went to the HK/CH market. As more exports go to HK/CH
market, less supplies will be sent to ROW, thus the prices in ROW markets will be forced
to be higher.
Turning to the ED results, the estimates of excess demand relationship yield
useful information. If we exclude chicken offal, the overall coefficient estimates for
import quantity (QjUS-HK/CH) are negative. This suggests that as more U.S. chicken feet,
100
wings, and legs are imported to HK/CH, the prices of these imports are likely to decrease.
For chicken offal (Table 5.5), two of the coefficient estimates of QjUS-HK/CH were positive
and the other two were negative, and none of these estimates were significantly different
from zero at 10 percent level, implying that chicken offal price is not affected by quantity
exported to HK/CH, and increasing quantity of chicken offal imports will not
significantly affect the price of the imports.
The coefficient estimates for HK/CH leg quarter imports are uniformly significant
and negative across chicken parts and specifications. The negative relationship between
prices of HK/CH chicken feet, wings, legs, and offal imports and the quantity of HK/CH
leg quarter imports implies that the more chicken leg quarters are imported to HK/CH,
the lower the price these chicken parts will be in the HK/CH market. However, the
HK/CH imports of U.S. leg quarters are determined by Russia’s imports of U.S. leg
quarters, because Russia is the dominant market for U.S. leg quarters. Thus, the prices of
these four chicken parts in HK/CH market are, in turn, affected by Russia’s imports of
leg quarters. As stated in Chapter 2, due to Russia’s economic crisis, Hong Kong
imported significantly more chicken leg quarters in 1999, and prices in HK/CH dropped
dramatically. When the Russia market for U.S. poultry products was open again in 2001,
the U.S. supplies to HK/CH were relatively less and average C.I.F. prices were higher
than several years ago when U.S. supplies did not have access to Russian market.
The estimated coefficients of Hong Kong GDP (GDPHK) are positive and
significantly different from zero at 5 percent level for all chicken parts, except for
chicken offal. This implies that chicken feet, wing and leg demand is positively and
significantly affected by GDPHK. For chicken offal (Table 5.5), the coefficient estimates
101
for GDPHK carry negative signs from all 4 specifications, with 3 out of the 4 estimates
being significantly different from zero at 10 percent level. When people’s income
increases, consumer will buy more chicken feet, wings, and legs; however, chicken offal
consumption will decrease. This suggests that chicken offal is an inferior product in
HK/CH.
The coefficient estimates of Hong Kong live poultry price (PHK_live) appeared with
significant negative signs only for some specifications of chicken feet (Table 5.2) and
wings (Table 5.3). This result suggests live HK/CH poultry may not be a substitute
product for frozen U.S. chicken parts.
Negative and significant relationship between HK/CH import chicken part prices
and Brazil exports was only found in the case of chicken wings (Table 5.3). The
estimates of coefficient for the variable QBrazil were negative but insignificant for chicken
feet (Table 5.2) and offal (Table 5.5), and positive and insignificant for chicken legs
(Table 5.4). This implies that when Brazil increases its worldwide chicken exports, the
price of U.S. chicken wing exports to HK/CH is most likely to decrease. As stated in
Chapter 2, Brazil is a major supplier of chicken wings, and a major competitor of U.S.
chicken wings exports.
As expected, the adjustment term, D1, did show its importance in explaining the
changes in the dependent variables, because most of the equations yielded significant
estimates for the variable, D1 at the 5 percent level, especially in the ES equations. Note
that the estimates of D1 in the ES equations were significantly different from zero at the 5
percent level for chicken feet (Table 5.2), wings (Table 5.3), and offal (Table 5.5) across
specifications, and significant at the 10 percent level for chicken legs (Table 5.4). The
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estimated coefficients for D1 in ED equations were relatively less significantly different
from 0. The significance shown in ES equations suggests that the substantial decreases in
“other” chicken exports in 2000 were accompanied by significant increases in the
specified parts exports. This may be due to changes in export reporting or classification
in 2000. The lower price response to D1 in ED equations suggests that the export prices
were less affected by the shift in 2000.
Finally, the excess supply estimation results for chicken wings are rather poor,
compared with the ES results for the other three chicken parts. As shown in Table 5.3,
none of the estimates for the explanatory variables in the ES equation are significant at
the 10 percent level, except for the adjustment term D1. This suggests that there are some
important factors affecting U.S. frozen chicken wings exports to HK/CH that were not
included in the ES model. For example, the U.S. not only exports frozen chicken wings,
they also export fresh/chilled chicken wings, and the biggest export market for
fresh/chilled chicken wings is Canada. Canada is the second largest import market for
U.S. frozen chicken wings, trailing only Hong Kong. As can be seen in Figure 2.6 in
Chapter 2, Canada imported considerable amounts of fresh/chilled chicken cuts, and
among them, chicken wings are one of the biggest chicken cuts category. Because we do
not have the monthly data of U.S. fresh/chilled chicken wings exports to Canada, we may
miss some information which is important to explain the quantity of U.S. frozen chicken
wings exported to HK/CH.
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3.4. Elasticity Estimates
Generally, elasticity (Ej) is calculated by the formula:
)/)(/( YXXYE j ∂∂= ,
where Y is the dependent variable, and X is the independent variable. Elasticities are
commonly calculated at the point of the overall mean of the variables X and Y, and that is
the approach followed here. One elasticity was calculated from the supply equation – the
elasticity of export quantity (QjUS-HK/CH) with respect to U.S. whole chicken production
(QUS). From the excess demand equation, we calculated the elasticities of export price
(PjUS-HK/CH) with respect to own quantity (Qj
US-HK/CH), HK/CH chicken leg quarter imports
(Qleg quarterUS-HK/CH), and Hong Kong GDP (GDPHK). The estimated elasticities for each
chicken part and specification presented in Tables 5.6 - 5.9. Note that the elasticities were
not reported in cases where the coefficient is not significantly different from zero at the10
percent level.
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Table 5.6. Estimated Elasticities for Chicken Feet Excess Supply and Demand
Elasticity Linear Prices Relative Pricesa (i3sls)
Relative Pricesa (3sls) b No Prices
Excess Supply: QfeetUS-HKCH
QUS 1.680 2.891 1.877 2.965 Excess Demand: Pfeet
US-HKCH Qfeet
US-HK/CH -0.497 -0.448 -0.497 -0.423 Qleg qtr
US-HK/CH -0.073 -0.073 -0.073 -0.073 GDPHK 0.952 1.210 1.011 1.109
a PUS and PROW represent US and ROW price relative to US-HKCH own-price, respectively. b Price ratios calculated before estimation, linear estimation used. 1: Coefficient estimation didn’t converge. 2: Coefficient estimate is not significant at the 10 percent level. Table 5.7. Estimated Elasticities for Chicken Wings Excess Supply and Demand
Elasticity Linear Prices Relative Pricesa (i3sls)
Relative Pricesa (3sls) b No Prices
Excess Supply: QwingUS-HKCH
QUS N/A2 N/A1 N/A2 N/A2 Excess Demand: Pwing
US-HKCH Qwing
US-HK/CH -0.456 N/A1 -0.496 -0.616 Qleg qtr
US-HK/CH 0.159 N/A1 -0.166 -0.146 GDPHK 0.770 N/A1 0.774 1.269
a PUS and PROW represent US and ROW price relative to US-HKCH own-price, respectively. b Price ratios calculated before estimation, linear estimation used. 1: Coefficient estimation didn’t converge. 2: Coefficient estimate is not significant at the 10 percent level.
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Table 5.8. Estimated Elasticities for Chicken Legs Excess Supply and Demand
Elasticity Linear Prices Relative Pricesa (i3sls)
Relative Pricesa (3sls) b No Prices
Excess Supply: QlegUS-HKCH
QUS N/A2 N/A1 1.629 3.318 Excess Demand: Pleg
US-HKCH Qleg
US-HK/CH -0.665 N/A1 -0.645 -0.618 Qleg qtr
US-HK/CH -0.090 N/A1 -0.104 -0.090 GDPHK 1.272 N/A1 1.128 N/A2
a PUS and PROW represent US and ROW price relative to US-HKCH own-price, respectively. b Price ratios calculated before estimation, linear estimation used. 1: Coefficient estimation didn’t converge. 2: Coefficient estimate is not significant at the 10 percent level. Table 5.9. Estimated Elasticities for Chicken Offal Excess Supply and Demand
Elasticity Linear Prices Relative Pricesa (i3sls)
Relative Pricesa (3sls) b No Prices
Excess Supply: QoffalUS-HKCH
QUS 6.620 8.086 6.510 10.565 Excess Demand: Poffal
US-HKCH Qoffal
US-HK/CH N/A2 N/A2 N/A2 N/A2 Qleg qtr
US-HK/CH -0.202 -0.181 -0.202 -0.159 GDPHK -1.002 -1.199 -1.271 N/A2
a PUS and PROW represent US and ROW price relative to US-HKCH own-price, respectively. b Price ratios calculated before estimation, linear estimation used. 1: Coefficient estimation didn’t converge. 2: Coefficient estimate is not significant at the 10 percent level.
As to the excess supply elasticity, the calculated elasticities of U.S. chicken part
export quantity (QjUS-HKCH) to US production (QUS) showed some slight variations. The
calculated elasticities for chicken feet vary from 1.680 in specification 1 to 2.965 in
specification 4 (Table 5.6). The calculated elasticity for chicken offal vary from 6.510 in
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specification 3 to 10.565 in specification 4 (Table 5.9), and those for chicken legs are
1.629 in specification 3 and 3.318 in specification 4 (Table 5.8).
Overall, the calculated excess demand elasticities are consistent across
specifications.
The percentage change of price (PjUS-HKCH) with respect to its own quantity (Qj
US-
HKCH) in the ED equations is called “price flexibility coefficient.” The price flexibility
coefficients were only calculated for chicken feet, legs, and wings, because coefficient
estimates for QoffalUS-HKCH were not significantly different from zero at the 10 percent
level. The magnitude of all the calculated price flexibilities were less than 1, with the
price flexibility ranging from -0.423 to -0.497 for chicken feet (Table 5.6), -0.456 to -
0.616 for chicken wings (Table 5.7), and -0.618 to -0.665 or chicken legs (Table 5.8).
This suggests that the parts prices were not very responsive to own quantity changes.
Chicken feet imports have the lowest price flexibility and chicken leg imports have the
highest price flexibility.
The calculated price flexibility of chicken part import price to HK/CH chicken leg
quarter imports (Qleg qrtUS-HK/CH) carried negative signs for all the four chicken parts, and
are all less than unity. The calculated flexibilities are -0.073 for chicken feet (Table 5.6),
from -0.146 to 0.159 for chicken wings (Table 5.7), from -0.09 to -0.104 for chicken legs
(Table 5.8), and from -0.186 to –0.202 for chicken offal (Table 5.9). With the absolute
value for chicken offal being the highest. This suggests that chicken offal was more
affected by the changes of leg quarter import quantity than other chicken parts.
Except for chicken offal, the estimated flexibilities of import price with respect to
Hong Kong GDP are all positive. The estimated price flexibilities vary from 0.952 to
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1.210 for chicken feet (Table 5.6), from 0.770 to 1.269 for chicken wings (Table 5.7), and
from 1.128 to 1.272 for chicken legs (Table 5.8). With the values around unity, it implies
that prices were somewhat responsive to changes in GDP growth. In general, the price
responsiveness is more flexible for chicken leg than those for chicken feet and wings.
Negative price flexibilities to Hong Kong GDP were found for chicken offal (Table 5.9),
and the magnitudes are greater than unity. It suggests that a 1 percent increase in Hong
Kong GDP level would decrease the chicken offal price by more than 1 percent.
Unfortunately there are almost no estimates of price responsiveness available in the
literature with which to compare the estimates given in Tables 5.6-5.9. However, if the
inverses of the own-quantity price flexibilities are interpreted as estimates of own-price
demand elasticities, the calculated values for all parts except offal are slightly more
elastic than the elasticity for China poultry demand (-1.336) reported by Wang et al.
(1998).
3.5. Model Estimation Statistics
3.5.1. System-weighted MSE, and system-weighted R2 statistics,
System-weighted mean square error (MSE) and system-weighted R2 statistics
measure the fit of the joint model obtained by stacking all the models together and
performing a single regression with the stacked observations weighted by the inverse of
the model error variances. The system-weighted R2s we obtained for linear 3sls
estimation of specifications 1, 3, 4 are 0.758, 0.806, and 0.702, respectively. It shows that
the estimated models explained approximately 80 percent of the variability of the
dependent variables.
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The R2 statistics are computed consistently with the calculation of the F statistic.
The ES and ED equations all seem to be quite well specified judging by the values of the
R2s obtained. It is valid for testing hypothesis but may not be a good measure of fit for
models estimated by instrumental variables methods, including 3sls (i.e., R2 may not be a
good measure of the goodness of fit of the model). However, R2 statistic is bounded (-∞,
0), so that values close to unity are still a fairly good indicator of the goodness of fit of
the individual equation.
3.5.2. F-Test
The F-test shown in the 3sls case is a valid test of the no-regression hypothesis
that the true coefficients of all regressors are 0. However, because of the first-stage
projection of the regression mean square, this is asymptotically F but not exactly F-
distributed in finite samples. Thus, for small samples the F-test is only approximate when
instrumental variables are used.
The F-ratio and its significance were obtained from the second stage estimation. It
shows that all the equations we used in 3sls estimation have the F-values with
significance level less than 0.0001, thus leads to the rejection of the null hypothesis that
the true coefficients of all the non-intercept parameters are 0. It implies that each
equation in the models explained most of the variance of its dependent variable.
3.5.3. The t statistics
The t statistic is the parameter estimate divided by the standard error when the
hypothesis is that the true parameter is 0. The t-tests are strictly valid in finite samples
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only for OLS estimates but are asymptotically valid for the other methods. In the
nonlinear specification, because the model is nonlinear, the standard error of the estimate,
the t value and its significance level are only approximate. These values are computed
using asymptotic formulas that are correct for large sample sizes but only approximately
correct for smaller samples.
The t statistics were not reported in this study, but their significance levels were
presented in Tables 5.2-5.5, by using ** as significant at the 5 percent level, and * at
the10 percent level. The interpretation of these coefficient estimates and their significant
level were discussed in the results section.
3.5.4. Durbin-Watson (DW) test
If the data are time series, it is possible that εt depends on εt-1 or, more generally,
the εts are not identically and independently distributed (i.i.d.). If the errors of a model
system are autocorrelated, the standard error of the estimates of the parameters of the
system will be inflated. However, the parameter estimates will still be unbiased and
consistent.
Note that there are missing values in some of our models. If there are missing
values, the test statistics are calculated according to Savin and White (1978). When the
residual series is interrupted by missing observations, Savin and White (1978) show that
it has the same null distribution as the DW with no gaps in the series and can be used to
test for autocorrelation using the standard tables. The Durbin-Watson statistic is not valid
for models containing lagged endogenous variables.
110
In this study, we obtained Durbin-Wastson (DW) statistics for each equation in
the estimated models, and the results show that there is evidence of positive
autocorrelation in these equations. The autocorrelation can be partially explained by the
data smoothing process. Although we did the test of autocorrelation, the Durbin-Watson
statistic, the properties of these tests are still not clear in simultaneous models when one
is using a 3sls estimator.
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CHAPTER 6
SUMMARY AND CONCLUSION
The U.S. poultry industry is the world’s largest producer and exporter of poultry
meat. Hong Kong/China (HK/CH) is the second largest export market for U.S. poultry
products. As the HK/CH market develops, the U.S. has benefited by exporting less
valuable chicken cuts to HK/CH and selling chicken breast meat in the domestic market.
The China market has great potential to be an important and growing market for poultry
meat in the future, because of its large population, rapid economic growth, relative low
per capita consumption level and its accession to the WTO.
The objective of this study is to examine the exports of U.S. chicken parts to the
HK/CH market, model the excess supply and demand of this trade flow, and report
findings related to HK/CH market responsiveness.
1. Study Summary
First, we discussed the international market for poultry meat and U.S. chicken
exports to Hong Kong/China. We also pointed out that the unique U.S.-HK/CH chicken
export pattern is partially attributed to the different chicken consumption preferences
between U.S. and HK/CH consumers.
A theoretical framework of excess supply (ES) and excess demand (ED) analysis
was then adopted. Four chicken products (chicken feet, chicken wings, chicken legs and
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chicken offal) were chosen for empirical analysis. Joint production and residual market
concepts were introduced. Based on the ES and ED theoretical framework and joint-
production considerations, general forms of excess supply and excess demand functions
were defined. Finally, the theoretical models were used to develop models for empirical
estimation and estimation results and calculated elasticities were reported. Four model
specifications were estimated in order to check the consistency of the estimation results.
The inverse excess demand (ED) specifications were exactly the same when
combined with the four excess supply specifications, and the estimation results for these
ED equations provided us with consistent results across specifications. In general,
negative relationships were found between HK/CH import price and own import quantity.
Positive relationships were found between import price and Hong Kong GDP level.
Three of the four specifications included prices in their excess supply (ES)
equations, however, the parameters estimated for these prices were not consistent with
expectations. The other primary variable in the ES equations, U.S. whole chicken
production, had positive and significant impacts on U.S. exports to HK/CH for most parts
and specifications. An ES specification, with the U.S. whole chicken production variable
but without any price variables, was constructed to be represent a scenario in which the
U.S. producers treat the chicken parts as by-products and HK/CH as a residual market.
This specification explained ES equations almost as well as those with price
specifications. It produced fewer results that conflicted with theory, and produced ED
parameter estimates that were generally very close to those produced by the other
specifications.
113
Based on the calculated elasticities, we found that quantity of U.S. chicken offal
exports to HK/CH are much more responsive to U.S. production levels than chicken feet
and legs. The flexibilities of import price with respect to import quantity are negative and
inflexible, and the flexibilities of import price to Hong Kong GDP level are near unity,
and positive for chicken wings, legs and feet but negative for chicken offal.
2. Conclusions
Overall, the quantities of U.S. chicken parts exported to HK/CH are positively
impacted by U.S. whole birds production. Coefficients of own price and alternative
market price variables were generally either insignificant or significant but with a sign
contradicting a priori expectations based on theory. Additional work on ES estimation is
needed, but these results may support the view that U.S. producers treat these chicken
parts as by-products of U.S. chicken production and the HK/CH market for these chicken
parts as a residual market. If this is true, U.S. producers may be able to improve profits
by giving more attention to prices in alternative markets if such markets exist.
With the exception of chicken offal, the demand for U.S. chicken parts in the
HK/CH market should continue to grow as HK/CH consumers’ income increases.
Combined with limited domestic chicken production in the HK/CH market, low per
capita poultry consumption, and expected growing income, HK/CH consumer demand
for chicken product will outgrow their domestic production, and their consumption of
U.S. chicken products may go up significantly.
The China market can absorb more chicken feet and offal without lowing prices
much. In the other words, increasing U.S. chicken feet and offal exports to the HK/CH
114
market would not cause its own export price to decrease significantly. According to the
empirical results obtained from this study, a 1 percent increase in HK/CH import quantity
of U.S. chicken feet would only cause a decrease on its own import price ranging from
0.423 percent to 0.497 percent.
The HK/CH chicken leg import price was more responsive to its own import
quantity than the other parts examined here. Even for legs, however, a 1 percent increase
in exports is accompanied with a decrease in price between 0.618 percent and 0.665
percent. This suggests the export revenues from legs would continue to increase with
greater quantities of exports, but the HK/CH market may be less able to absorb increases
in leg shipments than increases of shipments of feet and offal.
Brazil’s worldwide chicken exports did not seem to significantly affect the price
of U.S. chicken parts exported to HK/CH, except for chicken wings. However, with
Brazil’s increasing market share in HK/CH market, U.S. chicken export prices may
eventually be negatively impacted.
3. Limitations and Future Research
The limitations of this study are caused primarily by the data problems. The data
we used in this study is mainly from USITC database, however, these data cannot be
guaranteed to be flawless, and we noticed some apparent data problems occurred in the
year 2000. Although we have attempted to deal with the data problem in this study, the
impact of potentially remaining data problems is not possible to assess.
Because the data for different U.S. chicken parts started only after January 1997,
we have to use the monthly data in the model estimation in order to meet the degree of
115
freedom requirement. The monthly observations may fluctuate widely due to some
sporadic incidents. In this study, we used statistical smoothing methods to reduce the
fluctuation effect, but this may still cause some noise in the estimation.
In this study, we were not able to evaluate the policy effect of China’s accession
to the WTO in December 2001. Because the data did not cover the time period when
policy was changed. Future study may include the 2001 and 2002 data to assess the
policy effect. Given the number of unexpected and insignificant efficient in the excess
supply equations, particular attention should be given to the estimation of excess supply
equations.
116
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