economic impact of newcastle disease -...

newcastledisease

ECONOMIC IMPACT OF

ON THEAUSTRALIANPOULTRYINDUSTRY

Ahmed Hafi

Russ Reynolds

Mark Oliver

ABARE RESEARCH REPORT 94.7

RR 94.1N/CONTENTS 12/5/05 10:16 AM

© Commonwealth of Australia 1994This work is copyright. The Copyright Act 1968 permits fair dealing forstudy, research, news reporting, criticism or review. Selected passages,tables or diagrams may be reproduced for such purposes providedacknowledgment of the source is included. Major extracts or the entiredocument may not be reproduced by any process without the writtenpermission of the Executive Director, ABARE.

ISSN 1037-8286ISBN 0 642 20291 5

Hafi, A., Reynolds, R. and Oliver, M. 1994, Economic Impact of NewcastleDisease on the Australian Poultry Industry, ABARE Research Report 94.7,Canberra.

Australian Bureau of Agricultural and Resource EconomicsGPO Box 1563 Canberra 2601

Telephone (06) 272 2000 Facsimile (06) 272 2001

ABARE is a professionally independent government economic researchorganisation.

Cover photograph: Courtesy of Inghams Enterprises Pty Ltd

ABARE project 7157.103

RR 94.1N/CONTENTS 12/5/05 10:16 AM Page ii

Foreword

This is the fourth ABARE report prepared for the Australian Quarantine andInspection Service in which the economic impact of changes in quarantineregulations are assessed. Earlier studies dealt with apples, pears, rice andsalmon meat. A discussion of the general issues involved in conducting aneconomic analysis of quarantine review was provided in ABARE TechnicalPaper 91.3.

Australia’s current quarantine regulations prevent the entry of chicken meatfrom all countries other than New Zealand. As part of a review of theseregulations, AQIS is conducting a full quarantine risk assessment, and hascontracted ABARE to undertake an assessment of the likely economiceffects of an outbreak of Newcastle disease in Australia.

An assessment of the potential economic effects of a disease outbreak is anecessary input to decisions about relaxing quarantine controls on theimport of chicken meat. The findings of this study provide an indication ofthe costs and benefits to Australian consumers and the producers of chickenmeat and eggs from such a change.

BRIAN FISHERExecutive Director, ABARE

May 1994

iii

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Acknowledgments

Research on this project was undertaken as a consultancy for the AustralianQuarantine and Inspection Service (AQIS).

The methods employed in the study have benefited greatly from theconstructive criticism provided by Roger Rose. The authors wish toacknowledge the helpful comments on the paper provided by Mike Hinchy,Lisa McKelvie, Paula Holland, Chrys Papadopoulos and Stephen Beare ofABARE and Dick Roe and Howe Heng of AQIS. The authors are alsothankful to Jeff Fairbrother of the Australian Poultry Industries Association,Hugh MacMaster of the Australian Council of Egg Producers and othermembers of the poultry industry for their help in the study.

iv

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Contents

Summary 1

1 Introduction 14Background 14Aims in the study 14The Australian poultry industry 15Structure and competitiveness of poultry industries 16

2 Newcastle disease in Australian poultry 19Nature of the disease 19Methods of disease spread 19Disease control policy 21Disease outbreak scenario 21

3 Economic impact of exotic Newcastle disease at the farm level 23Analytical framework 23Farm level impact 24Sensitivity of farm cash flow to imports 28

4 Economic impact of exotic Newcastle disease at the national level 31Analytical framework 31Impact of disease – with no imports 34Impact of imports – with no disease 40Impacts of disease – with imports 43

5 Critical probability of Newcastle disease – the balance between costs and benefits 45

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AppendixesA Farm models 49B The econometric modelling framework – use of EMABA 53C Estimation of losses to consumers and producers 57D Elasticities of supply and demand 59E Estimating apparent net gain from imports 62F Markov chain process 64

References 66

Boxes1 Base model for an unaffected farm 242 Changes assumed for an affected farm 243 Farm level impact on an affected farm 254 Assumptions on meat demand elasticities 375 Assumptions on supply elasticities 386 Other assumptions 397 Imports of chicken meat 41

FiguresA Effects of exotic Newcastle disease on the cash flow of

a chicken meat farm 26B Effects of exotic Newcastle disease on the cash flow of

a layer farm 27C Effects of a disease outbreak on the supply of chicken

meat at a national level 31D Effect of an outbreak of Newcastle disease on the

Australian chicken meat and egg markets 34E Probability of disease over time 46F Effect of imports on the Australian chicken meat market 62G Producer losses from an outbreak of Newcastle disease,

with imports 63

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Tables1 Australian production and use of poultry meat 162 Structural characteristics of Australia’s poultry meat

industry 173 Effect of an outbreak of Newcastle disease on the

financial performance of an average chicken meat farm in New South Wales 28

4 Effect of an outbreak of Newcastle disease on the financial performance of an average layer farm in NewSouth Wales 29

5 Sensitivity of farm cash income and rate of return to capital on chicken meat farms to imports 29

6 Net loss to Australian society of an outbreak ofexotic Newcastle disease in the chicken meat and eggindustries without imports in the short run 40

7 Apparent net gain with imports of chicken meat 428 Cost to the chicken meat industry of an outbreak of

Newcastle disease, with imports of chicken meat 439 Critical initial probability of loss that would make sum of

present value of net gain to society equal to zero 4710 Farm budget of an average unaffected broiler farm in

New South Wales in 1992 4911 Farm budget of an average affected broiler farm in

New South Wales in 1992 5012 Farm budget of an average unaffected layer farm in

New South Wales in 1992 5113 Farm budget of an average affected layer farm in

New South Wales in 1992 5214 Chicken meat demand elasticities in EMABA 5515 Baseline equilibrium price and quantity of chicken meat 5516 Estimated chicken meat demand elasticities 5917 Chicken meat supply elasticities estimated using

quarterly data 60

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1Newcastle disease

Summary

The Australian commercial poultry industry com-prises a variety of avian species used for producingeggs and meat. The gross value of poultry meat andegg production in 1992-93 was estimated to havebeen $782 million and $277 million respectively.Together these industries accounted for almost 10per cent of the total gross value of Australian live-stock farm production in that year.

Strict quarantine controls on imports have assistedAustralia to maintain relative freedom from aviandiseases of major economic importance such asNewcastle disease. Currently, imports of fresh andfrozen chicken meat are prohibited from all countrieswhile cooked, uncanned poultry meat can be im-ported only from New Zealand.

The governments of the United States, Denmark,Thailand and New Zealand have all requested arelaxation of Australian quarantine controls onimports of chicken meat. As part of a review of theseregulations, the Australian Quarantine and Inspec-tion Service (AQIS) is conducting a full quarantinerisk assessment and in relation to this AQIS hasasked ABARE to undertake an economic analysis ofthe potential impact of exotic avian diseases on thedomestic poultry industry.

Because it is possible that there could be an outbreakof exotic avian diseases under current importrestrictions, ABARE has analysed the economiccosts of Newcastle disease both with and withoutimports. The costs to producers and consumers ofpoultry products of a disease outbreak under currentimport restrictions is contrasted with the gains toconsumers and costs to producers if chicken meat

Poultry and eggindustries

contribute 10 percent of livestock

output

The Australianindustry is relatively

free of aviandiseases

Australia has beenasked to relax its

quarantine controls

ABARE hasanalysed the

economic costs ofan outbreak of

Newcastle disease

RR 94.1N/SUMMARY 12/5/05 10:14 AM Page 1

imports (no disease) were allowed and the additionalcosts to producers of a disease outbreak.

Disease outbreak scenarioExotic Newcastle disease is widely recognised as themajor disease threat to the Australian poultryindustry, but considerable uncertainty surrounds thepossible extent and severity of an outbreak inAustralia. Where there is significant uncertaintyabout the behaviour and impact of a disease, a con-servative approach is to select and analyse a plaus-ible worst case disease outbreak scenario.

An outbreak of exotic Newcastle disease could occurin any state of Australia. However, an outbreak inNew South Wales is likely to have the greatest impacton the industry. This is because of the concentrationof the industry in that state — around 45 per cent oftotal Australian chicken meat farms and around 39per cent of national broiler production come fromNew South Wales. It also has the largest proportionof egg chickens in Australia and in 1991-92 itaccounted for around 34 per cent of total eggproduction.

The worst case scenario used in the economicanalysis was developed in consultation with industryrepresentatives and animal health authorities. It canbe summarised as a velogenic strain of Newcastledisease virus being first detected on a broiler farmsituated in the southern area of Sydney. In thisscenario the disease is not detected early and there isconsiderable initial spread of the disease by themovement of infected poultry products and equip-ment. Southerly breezes and cool overcast weatherspeed the spread of virus to other broiler farms aswell as egg and game bird farms. With increasingnumbers of birds being infected there is an increasingvolume of the virus being excreted into the air,thereby exacerbating airborne spread.

2 ABARE research report 94.7

A plausible worstcase scenario isanalysed

An outbreak inNew South Wales islikely to have thegreatest impact

The case studiedstarts in Sydney

. . . and spreads toother broiler farms


It is assumed that the disease spreads to all the farmsin outer Sydney and the Hunter Valley regions. Thesefarms collectively comprise around 75 per cent ofchicken meat farms and 60 per cent of layer farms inNew South Wales.

For the purpose of this study, the exotic Newcastledisease virus is assumed to be completely eradicatedafter the initial outbreak and no spread is assumedbeyond outer Sydney and the Hunter Valley regions.A national strategy for the eradication of the diseaseincludes measures to prohibit the movement of birds,products and materials to and from infectedproperties, the humane slaughter of infected birdsand sanitary disposal of carcasses and the dis-infection of sheds, yards, poultry products andvehicles etc.

Impacts of a disease outbreak – noimportsIf all poultry farms in the Hunter Valley and the outerSydney areas were affected, the sudden loss of birdsand subsequent destocking for a five month periodwould in the first year:

• reduce production of the average chicken meatfarm by around half, leading to:

– farm cash income falling by over 65 per centand

– a negative rate of return to capital; and

• result in the loss of approximately 44 millionbroiler birds, or 15 per cent of Australia’s totalbroiler stock.

The spread of Newcastle Disease into layer farmswould in the first year:

• reduce egg production on affected farms by 57 percent, leading to:

3Newcastle disease

All farms in outerSydney and the

Hunter Valley are affected

. . . but the outbreakis contained to

these areas

. . . and eradicatedafter the initial

outbreak

With no imports:

– production is cutby half

– broiler stocksdrop 15 per cent

– egg productionfalls considerablyon affected farms


– farm cash income falling by 53 per cent and therate of return to capital falling from 10 per centto 2 per cent; and

• lead to a total egg loss of around 28 million dozen,or 18 per cent of Australia’s estimated eggconsumption.

The subsequent increase in average producer pricesof chicken meat and eggs, because of lower pro-duction, would benefit the non-affected farms inNew South Wales and other states. This benefitwould persist until the national poultry industry fullyadjusted to the initial increase in price by raisingoutput. That is, non-affected farms would increasetheir production in response to higher prices and inturn this higher production would subsequentlyplace downward pressure on prices.

An outbreak of exotic Newcastle disease underexisting import restrictions would impose economiccosts on consumers of poultry meat and eggs. Therewould be a total loss to Australia from the diseaseoutbreak of some $69 million in the first year underthe scenario outlined.

• The 15 per cent reduction in national chickenmeat production would mean an overall loss in thechicken meat sector of $54 million or nearly 4 percent of the estimated gross retail value of chickenmeat production in 1992-93 ($1350 million). Thecomponents of the economic impact of thedisease in the chicken meat sector are:

– a consumer loss of some $109 million (or $6per person) due to higher prices,

– a producer loss of some $45 million in affectedareas, and

– a producer gain of some $100 million in un-affected areas due to higher prices.

• The overall national loss in the egg sector isestimated to be $15 million or about 5 per cent of


– and by 18 percent for Australia

Producer priceswould rise

. . . benefiting non-affected farmers

But total costs toAustralia would bearound $69 million

. . . a loss of $54million to thechicken meat sector

. . . and $15 millionto the egg industry


the gross value of egg production in 1992-93($311 million). The components of the economicimpact of the disease on the egg sector are:

– a consumer loss of some $23 million (or $1 perperson) due to higher prices,

– a producer loss of some $11 million in affectedareas, and

– a producer gain of some $19 million in un-affected areas due to higher prices.

• The total loss to consumers from a diseaseoutbreak would be $7 per person in the year of theoutbreak.

Impact of poultry meat importsIndustry sources have claimed that if quarantinerestrictions on chicken meat imports were lifted,imports of chicken meat could grow to 20 per centof domestic consumption (around 100 000 tonnes ayear) over a short period of time. This growth ratemay be plausible because some overseas exportoriented industries such as those in the United Stateshave the capacity to export high volumes and landthe product in Australia at lower prices than currentdomestic prices, especially if frozen poultry importswere allowed.

If only cooked chicken meat imports were allowed,imports could displace some 25 per cent ofAustralian cooked chicken meat consumption — thisimplies imports of some 40 000 tonnes a year.Cooked chicken meats account for around 30 percent of domestic chicken meat consumption.

Impact of chicken meat imports – nodiseaseGains to Australian consumers because of lowerchicken meat prices, were estimated for a range ofimport volumes — from 5000 to 100 000 tonnes a

5Newcastle disease

Consumer loss is$7 per person

If quarantine werelifted, imports couldgrow to 20 per cent

of consumptionquickly

If cooked importswere allowed,

imports could meeta quarter of cooked

consumption

A range of importvolumes were

considered


year. These consumer gains were compared with thelosses incurred by chicken meat producers whicharise from lower prices for broilers. Whilever thereis no disease outbreak, and the landed price ofimported poultry meat is below the domestic marketprice, the gains to consumers will be greater than thelosses to producers. This is because consumerbenefits from both the lower price and increasedconsumption (domestic production plus imports)exceeds producer losses from a lower price andreduced production. Egg consumers would not gainfrom imports of chicken meat.

The net gain to Australia in the short run fromimports of 40 000 tonnes or less could range fromzero to $3 million a year. A much higher import level,of 100 000 tonnes a year, could lead to a greaterapparent net gain of nearly $16 million a year. Insubsequent years, as chicken meat producers adjustto the price decreases by reducing production, the netgains to society would diminish.

Apparent net gain with imports of chicken meat andno disease outbreak – first year results if importsallowed in 1993 In 1993 dollars

Gain to Loss toconsumers producers Net gain

$m $m $mAnnual imports5000 tonnes 7.72 7.67 0.0540 000 tonnes 61.95 59.33 2.62100 000 tonnes 155.82 139.84 15.98


. . . by $16 million ayear with imports of100 000 tonnes

With no disease,gains to consumersoutweigh losses toproducers

With imports and adisease outbreak,prices wouldchange little

Impact of chicken meat imports – with adisease outbreakIf there were an outbreak of Newcastle disease afterimports had been allowed, the price of chicken meatwould not be expected to change because imports areassumed to increase to match the loss in production


7Newcastle disease

resulting from an outbreak of the disease. Thereforethere would be no impact of the disease on con-sumers of chicken meat.

Producers would incur costs from the loss of pro-duction resulting from the disease outbreak. Thesecosts would be additional to the costs to producersfrom imports. The additional producer losses from adisease outbreak fall as the level of imports rises ifit is assumed that the industry has already adjustedto the effects of imports before there was a diseaseoutbreak.

The loss to producers because of an outbreak ofNewcastle disease in the chicken meat marketdecreases from $37 million in the first year withimports of 5000 tonnes a year to $29 million withimports of 100 000 tonnes a year. This is because thenumbers of domestic broiler producers and thereforeindustry output would already have been reducedbecause of the imports.

However, if there were an outbreak of Newcastledisease, the total loss to producers would amount to$93 million if only cooked imports (40 000 tonnes)were allowed. This would rise to $169 million ifcooked and frozen imports (100 000 tonnes) wereallowed.

. . . but producerswould incur costs

. . . ranging from$37 million to $29million dependingon level of imports

before the outbreak

. . . plus the costresulting from

imports

Cost to broiler producers of an outbreak ofNewcastle disease, with imports a In 1993 dollars

Loss to chicken meat producersDue to Due to

imports disease Total

$m $m $mAnnual imports5000 tonnes 8 37 4540 000 tonnes 59 34 93100 000 tonnes 140 29 169

a First year results of an outbreak of exotic Newcastle disease.


The losses to both producers and consumers of eggsand the transfer from consumers to producers of eggsbecause of the disease outbreak is assumed to beunaffected by the varying level of chicken meatimports. The total loss to the egg industry, therefore,remains unchanged at $15 million as estimated forthe case of a disease outbreak without imports.

The net change in national welfare can be calculatedas the difference between losses to both producersand consumers of poultry meat and eggs, and thetransfer from consumers to producers of eggsbecause of the disease. With imports of chicken meatof 40 000 tonnes (the level of imports which mightbe expected if restrictions on cooked chicken meatonly were lifted) and a Newcastle disease outbreak,the net loss to Australia in the year of the outbreakwould be at least $46 million.

With imports of chicken meat of 100 000 tonnes(restrictions on both cooked and fresh–frozenchicken meat imports lifted) and a Newcastle diseaseoutbreak, the net costs to Australia would be around$28 million. The net loss is significantly lower withthe higher level of imports because the gains toconsumers arising from the lower prices of importsalmost counteract the overall losses to producersfrom both imports and the disease outbreak.


Change in national welfare from a Newcastle disease outbreak and imports aIn 1993 dollars

Chicken meatEggs

Producers Consumers Net net Total

$m $m $m $mAnnual imports5000 tonnes –45 +8 –37 –15 –5240 000 tonnes –93 +62 –31 –15 –46100 000 tonnes –169 +156 –13 –15 –28

a First year results of an outbreak of exotic Newcastle disease.

Losses to theegg industry are $15 million

Net loss toAustralia is $46 million forimports of 40 000 tonnes

. . . falling to$28 million forimports of 100 000 tonnes


9Newcastle disease

Balance between the cost of adisease outbreak and the apparentnet gain from importsIt is important to note that the expected values of thecost of a disease outbreak will differ with eachdifferent level of probability of a disease outbreak.In assessing whether imports would result in a netgain to Australia, it is necessary to weight the cost ofa disease outbreak by the probability of an outbreakoccurring.

Present day values of both the costs and benefitswould also need to be calculated for all future yearsand not just for the first year of the outbreak aspresented in the tables so far. In the analysis under-taken, the impacts of an outbreak of Newcastledisease were largely dissipated after five years.

In weighing the cost of disease risk against theapparent net gain to consumers, an agreed technicalassessment of the probability of entry of the diseaseand the uncertainty associated with the productionlosses is needed. However, there is currently limitedinformation available on the risk or probability of adisease outbreak. Against this background the finalobjective in this study is to derive the critical initialprobability (or the critical probability of introduc-tion) of poultry disease outbreak.

The probability of introduction of a disease in-fluences the probability of disease in each of the sub-sequent time periods, depending on the probabilitiesof transition from one disease state to another. Thecritical initial probability of a disease outbreak is thatlevel which, under certain assumptions, yields aseries of probabilities of disease transition over timesuch that the cost of the disease outbreak equals thenet gains from allowing imports of chicken meat intoAustralia.

Costs of a diseaseoutbreak vary with

the probability ofan outbreak

. . . but informationon the probability

of an outbreakis limited

The critical initialprobability of a

disease outbreakmust be calculated

. . . and are largelydissipated after five

years


Any technical assessment of the risk of a diseaseoutbreak, if quarantine restrictions were lifted, couldbe compared with these critical initial probabilitiesof a disease outbreak to assist policy makers inassessing the overall costs and benefits of changingthe import provisions.

The critical initial probability of a Newcastle diseaseoutbreak in the poultry industry was calculated fordifferent import levels by equating the expectedstream of net gains from poultry imports with aprobability weighted expected stream of costs overfive years after the time it is assumed that importrestrictions are lifted.

At import levels of 5000 tonnes or less, the producerlosses from a disease outbreak are large, while thegains from imports are negligible. It follows that thecritical probability is very low (say 1 in 1851). Therisk of entry of the disease would therefore need tobe less than one chance in 1852 for the expectedbenefits from allowing imports to offset the expectedcosts of the disease. This situation is analogous to thecurrent situation where no imports are allowed.

For an intermediate level of imports, say 40 000 tonnesa year, the probability of a disease outbreak wouldhave to be less than 1 in 26 (0.038) for net nationalgains to be made from removing import restrictions.

With higher imports there are larger gains to con-sumers and so Australia could tolerate a larger riskof entry of Newcastle disease. At an import level of100 000 tonnes a year the probability of a diseaseoutbreak would need to be greater than one chancein three (0.34) if the expected costs from a diseaseoutbreak are to be greater than the benefits from thatlevel of imports. This occurs because the world pricefor poultry meat is below that prevailing in Australia,and hence consumers gain from lower prices in caseswhere imports are allowed.


. . . to help inassessing costs and benefits

For there to bebenefits fromimports, the criticalprobability of adisease outbreakneeds to be:

– extremely low for imports of5000 tonnes

This was done forassessing anoutbreak ofNewcastle disease

– more than 1 in 3for imports of 100 000 tonnes

– less than 1 in 26for imports of 40 000 tonnes


A decision rule for deciding whether toallow importsThere is a considerable degree of uncertainty aboutthe likely cost of a disease outbreak and the gainsfrom importing poultry meat. In decision makingunder uncertainty the most frequently used decisionrule is to choose the action that minimises the risk ofthe worst possible outcome. This is equivalent toconsidering a position of extreme risk aversion byproducers. Because producers are generally riskaverse, they assess the risk of losses from a diseaseoutbreak above its expected or average value.

The 5000 tonnes import scenario, where the apparentnet gains are lowest ($0.13 million) and the losses toproducers of disease are at their maximum ($152million), represents the worst outcome considered inthis study. The critical probability of a diseaseoutbreak associated with this worst outcome is verylow (0.00054). Under this decision rule, importswould be allowed only if the risk of entry of thedisease was less than one chance in 1852.

Key qualificationsUnder the worst case scenario for an outbreak ofexotic Newcastle disease, estimates of the costs of

11Newcastle disease

Critical initial probability of a disease outbreak, where the cost of a diseaseoutbreak is equated to the net gains from imports a

Producer losses from disease Net gains CriticalChicken Egg from chicken initial

meat sector b sector meat imports c probability

$m $m $mAnnual imports5000 tonnes 112 40 0.13 0.0005440 000 tonnes 101 40 8.00 0.03829100 000 tonnes 89 40 49.00 0.33547

a Gains and losses are the sum over the five years in which almost all of the impacts of a diseaseoutbreak would occur, with the present values calculated assuming a discount (or interest) rate of 8per cent. b Loss to producers arising from a disease outbreak after import restrictions are removed.c Apparent net gain to society (gain to consumers less loss to producers) with imports allowed.

Decision rule

. . . choose theaction that

minimises the riskof the worst

possible outcome

For imports of 5000 tonnes, thismeans allowing

imports only if therisk of a diseaseoutbreak is lessthan 1 in 1852


the outbreak with current import restrictions are validonly under strong assumptions of transition from anear zero probability of disease state with quarantine,to certainty (probability = 1) of disease state withquarantine.

Because of the uncertainty about the introduction ofexotic Newcastle disease into Australia under currentimport restrictions, the actual value of loss under theworst case outbreak could be lower/higher than theestimates made. Ideally the estimated loss should beweighted by an agreed technical assessment of theprobability of entry of the disease. However, as statedpreviously there is currently limited information onthe probability about an outbreak and limitedepidemiological modelling or simulation of exoticNewcastle disease dynamics.

Retail prices of chicken meat and eggs were used inthis study to calculate welfare changes. With a highdegree of vertical integration in the Australianpoultry industry, the estimated changes in producerwelfare would largely incorporate the changes thatwould occur in the welfare of feed mixing, breeding,fresh meat processing and other support activitieswithin the poultry industry.

However, the economic impacts on the game birdsector and on upstream industries such as thefeedgrain industry and downstream industries suchas the cooked/processing chicken meat industry arenot accounted for in this study. These industries andemployment in the affected region would also beadversely affected by an outbreak of disease.

ABARE’s best estimates of supply and demandelasticities of chicken meat, eggs and other livestockproducts were used in this study. However, theproducer and consumer losses and consumer gainsestimated may vary as a result of changes in theseelasticities.


Information onprobability of anoutbreak is limited

Welfare effects arecalculated for thepoultry industryonly

. . . but extend tothe game birdsector and toupstream anddownstreamindustries

Estimates ofelasticities affectthe results

Assumptions abouttransition to diseasestate


The costs of a disease outbreak and net gains fromimporting poultry meat have been measured in thisstudy using changes in equilibrium quantities andprices in the Australian retail chicken meat market.The modelling approach also takes into account thesimultaneous changes in equilibrium quantities andprices of other meat markets in Australia. The costsand net gains modelled fully incorporate thesubstitution relationships between chicken and othermeats and so capture the total cost and net gain withinAustralian meat markets.

However, there are likely to be costs outside thedomestic meat sector that are not accounted for inthis study. For example, the impact of exoticNewcastle disease on wild and pet bird populationshas not been measured in this study. Consequently,this study represents the lower bound of total costsof the worst case scenario of an outbreak of exoticNewcastle disease in Australia.

13Newcastle disease

Although the effectson other meats are

included in theanalysis

. . . effects on otherbirdlife are not



1Introduction

BackgroundThe governments of the United States, Denmark, Thailand and New Zealandhave all requested a relaxation of Australia’s quarantine controls on importsof chicken meat. As part of a review of these regulations, the AustralianQuarantine and Inspection Service (AQIS) is conducting a full quarantinerisk assessment and in relation to this AQIS has asked ABARE to undertakean economic analysis of the potential impact of exotic avian diseases on thedomestic poultry industry.

Because it is possible that there could be an outbreak of exotic avian diseasesunder current import restrictions, ABARE has included an assessment ofthe costs to producers and consumers of poultry products of a diseaseoutbreak without chicken meat imports with its assessment of the gains toconsumers and costs to producers of allowing chicken meat imports (whenthere is no disease outbreak) and the additional costs to producers of adisease outbreak when imports of chicken meat are permitted.

Strict quarantine controls on imports have helped Australia maintainrelative freedom from avian diseases of major economic importance suchas Newcastle disease. Currently, imports of fresh and frozen chicken meatare prohibited from all countries, while cooked uncanned poultry meat canonly be imported from New Zealand. Canned poultry products are allowedentry from any country provided specific preparation requirements are met.

AQIS (1991) has identified several major poultry diseases of quarantineconcern associated with the import of fresh, frozen and cooked chickenmeat. The economic analysis presented in this report examines the impactof one of these diseases, Newcastle disease. Newcastle disease is a highlycontagious and pathogenic viral disease considered to be potentially one ofthe most damaging to Australia’s poultry industry.

Aims in the studyThe production loss resulting from an outbreak of a poultry disease haseconomic costs to both producers and consumers of poultry meat and eggs.

RR 94.1N/CHAPTER 1 12/5/05 10:18 AM Page 14

Even if the current restrictions on poultry imports are to be maintained, thedisease could still be introduced through migratory birds, smuggled birdsand eggs. Some risk of contaminated chicken meat being imported mustexist if imports are allowed, and therefore with imports of poultry productsthe Australian industry would face a greater disease risk. Infected poultrycarcasses and offal were found to be the source in most cases of the inter-national spread of exotic Newcastle disease.

The aims in this study are to:

• assess the economic cost to producers and consumers of poultry productsresulting from an outbreak of exotic Newcastle disease, both with andwithout poultry meat imports;

• assess the apparent net gain to Australian society of allowing chickenmeat imports; and

• measure the critical probability of a disease outbreak occurring, whichcould be used by policy makers as a guide in determining the best decisionon whether or not to allow chicken meat imports when viewed from thepoint of view of all Australians.

The Australian poultry industryThe Australian poultry industry comprises a variety of avian species usedfor the commercial production of eggs and meat. The gross value of poultryproduction is estimated to have been $782 million in 1992-93, constituting7 per cent of the total gross value of Australian livestock production(ABARE 1993). The poultry industry is divided into three industryspecialisations — chicken meat (or broiler) production, chicken eggproduction and game bird meat production. The latter industry encompassescommercial production of species such as quail, squab pigeons, pheasant,partridge and geese (Millington 1991).

The Australian poultry meat industry is oriented almost exclusively todomestic consumption requirements. Imports, apart from small quantitiesof cooked canned meat, are not allowed under Australian quarantine lawsand exports amount to less than 1 per cent of total domestic production (table1). The Australian egg industry is similarly oriented to domestic marketrequirements.

New South Wales and Victoria are the two main poultry meat and eggproducing states in Australia. At March 1990, New South Wales accounted

15Newcastle disease



for around 44 per cent of total Australian meat poultry numbers and 35 percent of egg producing poultry numbers. At the same date, Victoria’s shareswere about 18 per cent and 25 per cent respectively.

The poultry industry in New South Wales is located relatively close to areasof consumption. Generally, broiler farms are located near feed andprocessing plants, reliable water supply and electricity. The outer Sydneyand the Hunter Valley areas share equally between them around 75 per centof chicken meat farms in New South Wales.

The New South Wales egg industry is also largely concentrated aroundmajor capital cities. The outer Sydney and the Hunter Valley areas supportaround 60 per cent of New South Wales egg farms. A further 26 per cent oflayer farms are located in the Tamworth area.

Structure and competitiveness of poultry industriesThe commercial chicken meat production process is both intensive andhighly mechanised. The chicken meat industry is vertically integrated, ascharacterised by company ownership of breeding farms, hatcheries, feedmills and some chicken meat growing farms and processing plants. Twolarge companies located in New South Wales supply 80 per cent of day oldchicks hatched and around 75 per cent of broiler chickens marketed inAustralia (table 2).

Australian production and use of poultry meat a

DomesticProduction Exports consumption

kt kt kg/person

1984-85 349 1.2 21.81985-86 370 1.7 23.01986-87 385 2.8 23.51987-88 399 2.4 24.71988-89 411 1.0 24.71989-90 423 1.5 24.61990-91 425 2.3 24.61991-92 455 3.6 25.71992-93 p 467 6.0 26.11993-94 f 496 7.0 27.3

a Dressed weight. p Preliminary. f ABARE forecast.Sources: ABARE (1993a); Bills (1993).

1


17Newcastle disease

In spite of the size of the two largest firms in the industry, it is likely (forthe reasons listed below) that there is a high degree of contestability in theindustry. This means that the poultry meat market can be characterised asbeing closer to perfect competition than to monopoly. This feature of theindustry is critical because it is the most important industry characteristicin determining the size of producer losses and the gains to consumersassociated with imports and an outbreak of Newcastle disease.

The chicken meat industry is assumed to be characterised by a high degreeof contestability because:

• there are few barriers to entry, and there are two medium sized hatcherieswhich supply chicks;

• the five medium sized firms in the meat production sector could counterattempts by the large firms to restrict supply to the market or to undertakediscriminatory pricing practices;

• current state regulations (setting minimum contract prices to broilergrowers) and trade practices legislation restrict predatory pricing;

• chicken meat is marketed through highly competitive supermarkets, fastfood chains and the food service sector; and

Structural characteristics of Australia’s poultry meat industry

Share of national total

Hatchery Meat Processing production production establishments

% % no.Large integrated firmsInghams 80 45 12APL (Steggles) 30 5

Medium sized firmsBartters 13 1Baiada 2Cordina no 25 1Golden Cockerel no 1Marven Poultry no 1

Small firmsNumerous localised operations(approx. 120 hatcheries) 7 5 approx. 90

Sources: Larkin (1991); Australian Poultry Industries Association (personal communication).

2

⎧⎨⎩

⎧⎨⎩

⎧⎨⎩


• there are strong substitution relationships between poultry and the othermeats, especially beef, which means that if poultry prices rise relative tothe prices of competing meats then consumption is likely to fall.

Egg production is undertaken in two different growing systems: theintensive cage system, accounting for around 95 per cent of eggs consumedin Australia, with the balance being produced on free range farms. Packingof eggs is mainly undertaken on the farm itself and most of the eggsproduced are marketed as shell eggs. The egg industry is very much lessvertically integrated than the chicken meat industry. The New South Walesegg industry was deregulated in 1989 and, as a result, the statutorymarketing body (the New South Wales Egg Corporation) ceased to exist.



19Newcastle disease

2Newcastle disease in Australian poultry

Nature of the diseaseNewcastle disease is caused by a virus called avian paramyxovirus andoccurs in domestic fowls, turkeys, pheasants, pigeons, quail, guinea fowland numerous species of wild and captive birds. Ducks and geese are lesssusceptible to severe disease (Geering and Forman 1987). The severalstrains of the virus are generally classified into three categories as velogenic(highly virulent), mesogenic (moderately virulent) and avirulent (novirulence), depending on the speed at which they cause mortality. Thevelogenic and mesogenic strains do not occur in Australia and arecollectively known as exotic Newcastle disease. Some avirulent strains areendemic in Australian poultry flocks and wild bird species.

There have been two recorded outbreaks of exotic Newcastle disease inAustralia, both occurring in Victoria in the early 1930s. In each instance thedisease was eradicated by a slaughter program.

The clinical signs of the disease vary considerably and in some cases arefrequently indistinguishable from those of other viral and bacterialinfections (DPIE 1990). Initial signs may include depression, loss ofappetite, rapid decline in egg production, diarrhoea, severe coughing andgasping. Nervous signs such as head tremors and wing paralysis usuallyfollow. The disease tends to appear suddenly and spreads rapidly,particularly within flocks confined in modern, high population densitysheds. Mortality rates depend on factors such as the immune status of thebird and virulence of the virus but can reach 100 per cent in young and adultbird populations within periods of 24 to 72 hours. For mesogenic strains themortality rate is generally about 10 per cent (Geering and Forman 1987).

Methods of disease spreadInfected poultry carcasses and offal are proven sources for the internationalspread of Newcastle disease (AQIS 1991). Frozen carcasses were animportant mode of transmission from one European country to another inthe 1940s and 1950s. It is believed that the first outbreak of the disease inAustralia resulted from exposure to infected offal carried in a foreign ship’s


garbage. Studies have shown that the virus can survive in various forms ofpoultry tissue from several days to possibly years depending on storagetemperature (AQIS 1991). Generally, the lower the temperature the longerthe virus is viable. Packaging materials used to wrap poultry meat can alsocarry the virus and remain infectious for a considerable length of time atroom temperature (Arzey 1989).

Within a flock the disease spreads mainly through contact with diseased orcarrier birds (Geering and Foreman 1987). Infected birds begin excretingthe virus in faeces and expired air about two days after infection. Trans-mission is by inhalation of virus laden air or by ingestion of drinking watercontaminated with nasal secretions or faeces containing the virus (DPIE1990). As clinical signs of the disease usually do not appear until 24 hoursafter the onset of virus excretion, birds may appear clinically normal duringthis period yet be infected and infectious.

Methods most important for the spread of disease between flocks and farmsare movement of infected poultry and poultry products (for example,contaminated litter, feed), and movement of farm workers and equipment(for example, in contaminated dust on clothing, trucks and chicken crates).The Newcastle disease virus has been shown to survive on feathers for 255days and in litter for 20 days (DPIE 1990).

Windborne contaminated material is another potentially important mode ofdisease spread, particularly in areas of high poultry concentrations. Arecorded outbreak in Northern Ireland was thought to have resulted fromthe virus being carried by the wind from a source 40 kilometres away (Arzey1989). Optimum conditions for windborne spread of the virus are cool,humid and overcast weather.

Wild birds, particularly pigeons, are considered to be potential although lessimportant spreaders of the disease (Arzey 1989). Free range farms andpoultry sheds without protection from free flying birds would be most atrisk from this source of infection. Rats and flies are also potential trans-mitters of the disease.

AQIS (1991) presents a possible scenario for the establishment of thedisease from infected poultry carcasses. Under this scenario the two mostlikely routes for spread are, first, feeding of scraps from infected poultrycarcasses to pet birds or backyard poultry which then come into contact withfree flying birds and, second, scraps and wrappings are discarded in



unsecured bins or rubbish tips to which free flying birds, flies and rodentshave access.

Disease control policyA national strategy for the control or eradication of an outbreak of exoticNewcastle disease is set down in the Australian Veterinary Emergency Plan(AUSVETPLAN). The current policy is to eradicate the disease as soon aspossible after detection. The main elements of this plan are to isolate suspector infected birds, implement quarantine and movement controls, slaughterand dispose of carcasses, destroy carriers of the disease (such as wild birds,flies and rats), and decontaminate infected sites and materials (DPIE1990).

Quarantine of infected or suspect premises prevents the spread of the diseaseby prohibiting the movement of birds, products and materials to and fromthe infected property. Movement controls would be followed as soon aspossible by the humane slaughter of infected birds and sanitary disposal ofcarcasses. Decontamination entails cleaning and disinfecting sheds, yards,poultry products, vehicles, etc. to remove all infective material. The controlor destruction of possible disease vectors is expected to continue untilseveral months after the virus is considered to have been eradicated (DPIE1990).

While the focus of the AUSVETPLAN is eradication, this strategy may haveto be replaced or supplemented by one of vaccination in the event of anextremely rapid spread of the disease or when measures to eradicate thedisease are generally seen to have failed (DPIE 1990). If the decision tovaccinate is taken, the live V4 vaccine manufactured in Australia would beused along with movement controls. Once this decision was taken, anyfurther slaughter of infected poultry would be at industry cost.

Disease outbreak scenarioConsiderable uncertainty surrounds the possible extent and severity of anoutbreak of exotic Newcastle disease in Australia. It is extremely difficultto predict, for example, in which state or region an outbreak may first occur,the virulence of the virus and therefore its impact on production, the speedand extent of disease spread from the point of initial outbreak, and evenwhich operations within an industry may contract the disease (for example,hatchery or growout farms).

21Newcastle disease


Where there is considerable uncertainty about the behaviour and impact ofa disease, a common approach is to select and analyse a plausible worst casescenario (see, for example, Hinchy and Low 1990; McKelvie 1991). Undera worst case scenario, losses from the disease are assumed to be as bad asplausible and to persist at least into the medium term.

The economic analysis presented in this report is based on the followingworst case scenario, developed after consultation with industry represen-tatives and animal health authorities.

Worst case scenarioA velogenic strain of Newcastle disease is assumed to appear on a broilergrowing farm situated in the southern area of Sydney. The disease is notdetected early and there is an initial spread of the disease through themovement of infected poultry or poultry products. Southerly breezes andcool overcast weather assist the spread of the virus to other broiler farms aswell as egg and game bird farms. With increasing numbers of birds beinginfected there is an increasing volume of the virus being exhaled into theair thereby exacerbating airborne spread. The disease spreads rapidly anderratically, stretching resources trying to eradicate the disease.

The virus is assumed to be completely eradicated after the initial attack andno spread is assumed beyond the outer Sydney and Newcastle areas.



23Newcastle disease

3Economic impact of exotic Newcastledisease at the farm level

A significant part of the poultry industry operates at the farm level. Analysisat this level is a useful guide to estimating the extent of a shift in theaggregate supply curve which is required for the national level analysis.Farm level data required for the financial analysis are readily available.

Analytical frameworkIn this study, farm level analysis was conducted using representative farmmodels. A model chicken meat farm grows day old chicks over 8 weeks toa marketable weight, and a model layer farm grows pullets as layers over88 weeks and sells eggs to the market. On average, a chicken meat farmgrows six batches of day old chicks (50 000 birds per batch) and a layerfarm grows three batches of pullets (10 000 birds per batch) a year.

To help assess the financial effects of a sudden destocking and, restockingafter five to six months if the disease is successfully eradicated, the farmmodel is conceived as a stream of monthly costs and receipts. Because ofthe relative ease with which the exotic Newcastle disease virus can spread,there is a possibility of the disease spreading to a part of the breeding farmsdespite the higher level of hygiene practised in these farms.

Chicken meat and layer farm models used in this study were constructed torepresent, in each case, the characteristics of an average farm in New SouthWales. The information used in the chicken meat farm model was providedby the New South Wales Chicken Growers Association, while theinformation used in the layer farm model was provided by the NSWDepartment of Agriculture and Fisheries. All prices and costs are based onvalues that prevailed in late 1992.

Important characteristics of a base farm model are presented in box 1 andother assumptions and details of the information used are given in the farmbudgets presented in appendix A (tables 10–12).

These models are modified to incorporate expected productivity reductionsafter the initial attack of the disease and the costs involved in returning tonormal operations (box 2).


Farm level impactIf all the chicken farms in the Hunter Valley and outer Sydney area areaffected as outlined in the worst case scenario of chapter 2, supplies tomarket would fall and the national average chicken meat and egg pricewould increase. The price increase would benefit the unaffected farms inboth New South Wales and other states, as well as the affected farms in NewSouth Wales after they resume operations with a new batch. The increasein national average retail prices of chicken meat and eggs because of lowerproduction are calculated in chapter 4. The farm level prices used in the farm


Box 1: Base model for an unaffected farm

Broiler Layer

• grows a total of 300 000 birds in • grows a total of 30 000 birds in 36 batches of day old chicks a year batches a year

• 8 weeks growing duration • pullets of 18 weeks of age are housed and replaced when they are

• grower receives a fee per 106 weeks oldbird picked for processing

• annual egg production rate of 246 eggs per hen housed

Box 2: Changes assumed for an affected farm

Broiler Layer• flock is destroyed in May • flock is destroyed in May• farm is ready for restocking in • farm is ready for restocking in

August; however, it is delayed till September; however,September because part of the it is delayed till Octoberbreeder stocks was also affected because part of the breeder stocksby the disease was also affected by the disease

• operations resume with a new batch • the first of three new batches of of placements in September pullets are placed in October

General• all imports of poultry products and birds are prohibited• no prevention measures such as vaccination are employed• no allowance is made for compensation received• the disease is fully eradicated after the initial attack• the cost of eradication and control is borne by the government


budgets (appendix A) were increased proportionately with the retail pricechange to incorporate the effect of the price increase on the cash receipts.

On infected chicken meat farms, the effect on cash flow would be limitedto the first five months after an attack. Cash flow returns to normal in thenext year because of the resumption of normal farm operations five monthsafter the disease outbreak (figure A). The longer production cycle for layerfarms (about 88 weeks) means that the effect on cash flow would be spreadover a longer period (figure B). The results of farm level impacts ofNewcastle disease are summarised in box 3 and the details are given inappendix tables 11 and 13.

Forgone revenue from contract fees is the major source of reduced farm cashincome for a chicken meat farm with the disease in the Hunter Valley andouter Sydney areas. Even though the destocking eliminates some cash costsduring the first five months after the attack, cash costs such as interestpayments and overheads still account for nearly half of the total cash costof a farm without disease (figure A and table 3). The farm cash income ofa chicken meat farm with the disease would drop to less than a third of thatof a farm without the disease, and the rate of return to capital would turnnegative in the first year.

25Newcastle disease

Box 3: Farm level impact on an affected farm

Broiler farm Layer farm

During the first year• broiler production is reduced by • egg production is reduced by 57

around half per cent• farm cash income falls to less • farm cash income falls to less than

than a third half• rate of return to capital is negative • rate of return to capital decreases

During the second year• annual production returns to normal • production returns to normal• price remains higher than that • price remains higher than

without the disease, resulting in without the disease, resulting in– a 13 per cent higher farm cash – a 40 per cent higher farm cash

income income– a higher rate of return to capital – a higher rate of return to capital

During the third year• effect of higher prices persists • effect of higher prices persist


The unaffected farms in the rest of New South Wales benefit by a 15 percent increase in farm cash income in the first year, because of an estimated8 per cent increase in the price of chicken meat (table 3). As the nationalpoultry industry adjusts in subsequent years to the initial price increase, theprice of chicken meat would gradually fall from the high levels of the firstyear. Increases in farm cash income of chicken meat farms in the rest ofNew South Wales, because of the price increase, would therefore beprogressively smaller.

The financial effects on a layer farm in the Hunter Valley and outer Sydneyareas with the disease would be more severe than those on a farm withoutthe disease. A complete lack of revenue during the first four months afteran attack and reduced revenue afterwards from sales of eggs is the majorsource of reduced farm cash income in a layer farm with the disease. The


A Effects of exotic Newcastle disease on the cash flow of a chicken meat�farm Hunter Valley and outer Sydney areas

ABARE

Cumulative farm cash income

Monthly cash cost

April May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar.

April May June July Aug. Sept. Oct. Nov. Dec. Jan. Feb. Mar.

$

1000

2000

3000

4000

5000

Without disease With disease


-20

$'000

20

40

60


total cash costs of a layer farm with the disease are reduced to 7 per cent ofthe total cash costs of a farm without the disease during the first six monthsafter the initial outbreak (figure B).

Second year cash receipts from egg sales are higher on a layer farm in theaffected region than on a layer farm in the unaffected region because of alower mortality of the restocked pullets. It should be noted that as an averagerate of egg production was assumed across all age groups, the effect on cashreceipts of a possible lower rate of egg production of restocked pullets hasbeen ignored in the analysis.

An assumed outbreak of exotic Newcastle disease of the magnitudedescribed above would reduce the farm cash income of a layer farm in theHunter Valley and outer Sydney areas by 53 per cent in the first year (table

27Newcastle disease

B Effects of exotic Newcastle disease on the cash flow of a layer farm ��

ABARE

Cumulative farm cash income

Monthly cash cost Without disease With disease


A M J J A S O N D J F M A M J J A S O N D J F M

$'000

10

20

30

40

50

60

-50

$'000

50

100

150

200

250

300

A M J J A S O N D J F M A M J J A S O N D J F M


4). In the second year, however, farm cash income will be 40 per cent higherthan that of a farm in the base year without the disease because of theincrease in cash receipts resulting from a higher egg price. From the secondyear, the rate of return to capital remains higher than the rate of return of afarm without disease mainly because of a higher egg price.

The increase in the national average price of eggs resulting from the loss ofegg production was estimated using a simple partial equilibrium model ofthe egg market.

The layer farms in the rest of New South Wales which are unaffected by thedisease benefit by a 52 per cent increase in farm cash income in the firstyear because of an estimated 9 per cent increase in the price of eggs (table3). As the national egg industry adjusts to the initial price increase insubsequent years, the price of eggs falls. Hence, the increases in farm cashincomes of egg farms in the rest of New South Wales become progressivelysmaller.

Sensitivity of farm cash flow to importsChicken meat imports would depress the market price of chicken meat andmay increase the risk of poultry diseases being introduced. Imports at fivedifferent levels were assessed. It was also assumed that the disease waseliminated in the year of the outbreak. The fall in chicken meat price related


Effect of an outbreak of Newcastle disease on the financial performance of an average chicken meat farm in New South Wales

Unit Year 0 Year 1 Year 2 Year 3

Farms in the Hunter Valley and outer Sydney – with disease Cash receipts a $ 132 140 71 355 140 067 139 539Cash costs $ 62 901 49 156 62 018 61 030Farm cash income $ 69 239 22 199 78 049 78 509Rate of return to capital % 3.40 –3.89 4.63 4.55

Farms in the rest of New South WalesCash receipts a $ 132 140 142 711 140 067 139 539Cash costs $ 62 901 62 901 62 018 61 030Farm cash income $ 69 239 79 810 78 049 78 509Rate of return to capital % 3.40 5.04 4.63 4.55

a Cash receipts include the increase in revenue that results from the increase in the national averageprice of chicken meat in presence of the disease.

3


29Newcastle disease

Effect of an outbreak of Newcastle disease on the financial performance of an average layer farm in New South Wales

Unit Year 0 Year 1 Year 2 Year 3

Farms in the Hunter Valley and outer Sydney – with disease Cash receipts a $ 883 866 416 477 942 967 935 802Cash cost $ 730 823 344 803 727 903 727 721Farm cash income $ 153 043 71 674 215 064 208 081Rate of return to capital % 10.24 2.46 15.90 15.09

Farms in the rest of New South Wales Cash receipts a $ 883 866 963 090 941 083 935 802Cash cost $ 730 823 730 823 729 360 727 721Farm cash income $ 153 043 232 267 211 724 208 081Rate of return to capital % 10.24 17.64 15.59 15.09

a Cash receipts include the increase in revenue resulting from the higher national average price ofchicken meat following an outbreak of Newcastle disease.

4

Sensitivity of farm cash income and rate of return to capital on chicken meat farms to imports

Decrease in farm cash income a Rate of return to capital

Year 1 Year 2 Year 3 Year 4 Year 1 Year 2 Year 3 Year 4

% % % % % % % %Without importsHunter Valley andouter Sydney b 67.9 (12.7) (10.4) (10.3) –3.89 4.63 4.55 4.36

With importsFarms in the Hunter Valley and outer Sydney5000 tonnes 76.1 0.8 0.7 0.6 –4.76 3.31 3.32 3.3310 000 tonnes 76.6 1.6 1.4 1.3 –4.82 3.23 3.25 3.2620 000 tonnes 77.6 3.1 2.7 2.5 –4.93 3.06 3.10 3.1140 000 tonnes 79.6 6.2 5.5 5.1 –5.14 2.73 2.80 2.83100 000 tonnes 85.4 15.4 13.7 12.8 –5.76 1.73 1.89 1.97

Farms in the rest of New South Wales5000 tonnes 1.0 0.8 0.9 0.9 3.29 3.31 3.32 3.3310 000 tonnes 1.9 1.6 1.4 1.3 3.18 3.23 3.25 3.2620 000 tonnes 3.8 3.1 2.7 2.5 2.97 3.06 3.10 3.1140 000 tonnes 7.6 6.2 5.5 5.1 2.54 2.73 2.80 2.83100 000 tonnes 19.7 15.4 13.7 12.8 1.30 1.73 1.89 1.97

a Compared with the levels in base year or year 0 (see table 3). b Farm cash income is higher in years2, 3 and 4 compared with the level of year 0 purely because of the effect of the higher price ofchicken meat.

5



to the five levels of imports was estimated (see chapter 4). It was assumedthat existing restrictions on egg imports are unlikely to be changed and thereare no flow-on effects to layer farms from lower chicken meat prices.

The market price of chicken meat in the first year falls by 0.5 per cent withimports of 5000 tonnes a year; by 1.1 per cent with 10 000 tonnes; by 2.1per cent with 20 000 tonnes; by 4.2 per cent with 40 000 tonnes; and by 10.3per cent with 100 000 tonnes of imports a year. Corresponding rates of fallin the market prices of chicken meat were progressively smaller insubsequent years as the poultry industry adjusted over time by loweringproduction. It was assumed that the contract growing fee per broiler alsofalls by the same percentage.

The sensitivity of farm cash income and rates of return to capital under thedifferent scenarios are reported in table 5. As expected, an outbreak ofdisease would make chicken meat farms worse off if imports were allowedthan if an outbreak occurred in the absence of imports. This is because farmprices are reduced if imports are permitted.


31Newcastle disease

4Economic impact of exotic Newcastledisease at the national level

A national level analysis is required to estimate the likely impact of anoutbreak of exotic Newcastle disease on Australian consumers andproducers in both affected and unaffected areas. The impacts of a diseaseoutbreak are likely to extend to markets for chicken meat substitutes. Thatis, any increase in the price of chicken meat arising from production lossescaused by an outbreak of exotic Newcastle disease can have an impact onthe producers and consumers of other meats.

The possibility of the virus spreading to native avian species could also havean impact on the environment.

Analytical frameworkAs a result of the disease outbreak scenario outlined in chapter 2, all thechicken meat farms in the outer Sydney and Hunter Valley areas would beaffected similarly to the average farm discussed in box 2. The supplyrelationship in the rest of Australia would not be affected. The affectedregion would cease to produce chicken meat and eggs for five to six monthsfollowing the outbreak. The impact of the complete lack of production inthe affected region during a part of a year on that region’s annual supplycurve and on the aggregate annual supply curve for Australia are illustratedin figure C.

C Effects of a disease outbreak on the supply of chicken meat at a �national level ABARE

P1P0

Qa'Qa QrQr' Q' Q

e

S'a Sa

b

b

SrD

a Affected region b Rest of Australia c Total

S'

S

f

lg

a

c

d

i

af j


The annual supply curve of the affected region without a disease outbreakis given by Sa or ab (panel a) and that of rest of New South Wales and otherstates is given by Sr (panel b). The market price of chicken meat isdetermined at P0 or at the intersection of the aggregate annual supply curve,S or fg, which is the horizontal summation of Sa and Sr and, the aggregatedemand curve, D. Equilibrium production at the aggregate level is given byQ, which is equal to the sum of the quantity produced in the affected region,Qa, and the quantity produced in rest of New South Wales and the otherstates, Qr.

With a disease outbreak, the annual supply curve of the affected region isforced vertical at point c to form the new supply curve given by acde. Theannual supply curve of the rest of New South Wales and the other states isunaffected. The equilibrium price would increase to P1 where the newaggregate supply curve, fijl or S', intersects the aggregate demand curve, D,at point b.

The initial loss in annual production in the affected region because of adisease outbreak is given by quantity f–d. The reduction in the equilibriumquantity produced in the affected region is given by Qa–Qa' and at aggregatelevel by Q–Q'. The production in the rest of New South Wales and otherstates would increase by Qr –Qr' in response to the higher price.

Economic impactsThe economic impact at a national level should represent the total effectsof an outbreak of exotic Newcastle disease in the affected regions and theflow-on effects on the poultry industries in the rest of New South Wales andthe other states. Such an analysis is conducted using a model adapted frommodels developed to calculate benefits from research (reviewed in Nortonand Davis 1981), social cost of regulation (Wilcox 1989) and costs andbenefits of quarantine (Hinchy and Fisher 1991). A single-market partialequilibrium approach is used in those models, which assumes that changesin one industry are not likely to have a major impact on other industries.

Assuming linear supply and demand curves, an analysis of movements fromone long run equilibrium position (no disease) to another long runequilibrium position (disease) is undertaken. The framework employed inthose other studies, which uses changes in equilibrium quantity and price,enables the measurement of losses to consumers and producers resultingfrom the spread of disease.



The analysis in this study extends the earlier framework by:

• allowing for the disease to affect only a part of the industry and for thedisease not to become endemic after the outbreak;

• allowing for cross-markets effects of changes in chicken meat price onother meats — beef and veal, lamb and mutton, and pig meat; and

• calculating annual losses and gains to society from the short run to theintermediate run for aggregation over time.

A multimarket equilibrium (limited to the meat sector) framework formodelling a perfectly competitive chicken meat market is discussed in detaillater in this section. Changes in the equilibrium quantities and prices in aperfectly competitive chicken meat market are measured in this study usinga multimarket approach because of close interrelations between individualmeat markets. The tool used in this study to measure changes is the elasticityversion of ABARE’s econometric model of Australian broadacre agricul-ture (EMABA) which models the Australian meat market as a system ofindividual meat markets.

EMABA’s meat market system includes separate markets for poultry, beefand veal, lamb, mutton, pork, and ham and bacon. The poultry componentof EMABA’s meat market system was modified for the purpose of this study(see appendix B for details).

A multimarket approach allows the changes in equilibrium quantities andprices in the poultry meat market to be measured by simultaneously takinginto account all equilibrium adjustments in the other meat markets. By usingsuch an approach, the social welfare effects of changes in supply or demandin a given market are captured completely in that market (Just, Hueth andSchmitz 1982). Similar approaches have been used by Lamieux andWohlgenant (1989) in an evaluation of the welfare impacts of introducinggrowth hormones in the US pork industry. The effects on the Australianeconomy beyond the meat sector are assumed to be negligible.

The spread of exotic Newcastle disease shifts the national supply curve forpoultry to the left (from S to S’ in figure D) and if the domestic market isclosed to imports, this results in an increase in the market price of poultrymeat (from P0 to P1). As discussed in chapter 3, farms in the rest of NewSouth Wales and other states which are unaffected would benefit from theincrease in the price of chicken meat. The industry is likely to adjust to its

33Newcastle disease


new intermediate term equilibrium by the disease affected non-viableproducers leaving the industry and by an expansion of production in non-affected areas.

Estimating the losses to consumers and producersAt an aggregate level, the losses to producers and consumers and the transferfrom consumers to producers resulting from an outbreak of Newcastledisease in the short to intermediate run are explained in appendix C.

Impact of disease – with no importsDespite the strict enforcement of regulations prohibiting imports of poultryproducts, live birds and eggs, there are still other ways by which exoticNewcastle disease could be introduced to Australia. The source of the firstoutbreak of the disease in Australia in 1930 in Melbourne is believed to havebeen virus contaminated refuse from a ship. Smuggling of live birds andeggs could be another source of the disease. As reported by Eaves andGrimes (1978) a strain of the exotic Newcastle disease virus was isolatedfrom a parrot illegally introduced to Australia from Indonesia. Promptaction to destroy the smuggled bird and disinfect premises was taken andthe commercial poultry flocks in the surrounding areas were monitored forclinical and serological evidence to prevent the spread of the disease.Migratory birds can also introduce the disease.

An outbreak of the disease in Australia could have devastating results,particularly in New South Wales. This is because 45 per cent of Australian


��

D Effects of an outbreak of Newcastle disease on the Australian chicken �meat and egg markets

ABARE

Q' Q

D

h

a

l

b

DS'

S

k

i

Sf

PoP1

j


chicken meat farms are located in New South Wales and these account foraround 39 per cent of Australia’s total chicken meat production (Larkin1991). The worst case scenario outlined in chapter 2 assumes that all farmsin the Hunter Valley and the outer Sydney areas of New South Wales (around75 per cent of the state total of 389 farms) would be affected. The HunterValley and the outer Sydney areas of New South Wales contribute approx-imately 30 per cent of Australia’s total chicken meat production.

In box 3 of chapter 3, a worst case Newcastle disease outbreak was estimatedto reduce the farm level chicken meat production by half in that year. Theestimated loss in farm production also includes the forgone productionresulting from the assumed two month delay in receiving new day old chicksbecause a part of the breeding stock would also be affected by the disease.Assuming an average farm production of 300 000 birds, the worst casescenario would result in the loss of approximately 44 million birds in NewSouth Wales or 15 per cent of an estimated broiler production of 300 millionbirds in 1993 in Australia.

New South Wales also has the largest concentration of egg layer chickensin Australia. In 1990-91, it accounted for around 36 per cent of the nationalegg layer population followed by Victoria with a 25 per cent share of thepopulation (ABS 1991b). Egg layer farms in New South Wales contributedaround 35 per cent of Australia’s total egg production in 1990-91 (ABS1991a). Again, the worst case scenario assumes all the layer farms in theHunter Valley and the outer Sydney areas of New South Wales are affected(approximately 60 per cent of a total of 197 layer farms). The Hunter Valleyand the outer Sydney areas thus contribute approximately 21 per cent ofAustralia’s total egg production.

The farm level loss in egg production in the first year of the disease wasestimated at 57 per cent (chapter 3). The estimated loss in farm level eggproduction also includes the forgone production resulting from the assumedtwo months delay in receiving pullet replacements because a part of thebreeding stock would also be affected by the disease. Assuming an egglaying rate of 18 dozen per hen a year and an average laying flock of 23 000birds a year, the worst case scenario would result in a total egg loss ofapproximately 28 million dozen in New South Wales or 18 per cent ofestimated Australian egg consumption in 1993.

It should be noted that there are differences in the worst case scenario usedin this study and the worst outbreak scenario presented in the Australian

35Newcastle disease


Veterinary Emergency Plan (AUSVETPLAN). Under a plausible worst casescenario for an outbreak of Newcastle disease ABARE has estimated thatthe total number of affected broilers and layers would be 46 millioncompared with 10 million under the worst case scenario in the AUSVET-PLAN. The main reason for this difference lies in the assumption of thenumber of farms affected. The worst case scenario in this study for NewSouth Wales covers 407 farms (289 chicken meat farms and 118 egg farms)compared with the 224 farms assumed in the AUSVETPLAN.

In the AUSVETPLAN the worst case outbreak scenario is based on anassumption of a similar outbreak to the avian influenza outbreak on 448farms in Pennsylvania in 1983-84. The poultry population in Pennsylvaniais much larger and more concentrated than that of New South Wales andtherefore the AUSVETPLAN’s worst case scenario assumed the diseasewould affect half that number of farms in New South Wales. However, asthere is no evidence available that an outbreak would be limited by existinglevels of concentration, in this study it is assumed that all the chicken meatand egg farms in the Hunter Valley and the outer Sydney areas would beaffected. This is consistent with the conservative approach taken in this riskanalysis as opposed to the operational approach of AUSVETPLAN.

In addition, in its worst case scenario the AUSVETPLAN assumes that onaverage 34 560 broilers per farm would be affected, which is 18 per centless than the average size of a broiler batch per farm in New South Walesin 1992. Besides, it appears that all the broilers assumed to be affected inthe AUSVETPLAN are also assumed to come from one batch and, as aresult, there is an apparent assumption of a destocking period of just twomonths (the duration required to grow one batch of broilers). ABARE hasassumed that on average 150 000 broilers per farm would be affected andthat with more than one batch of broilers affected the destocking periodwould be five months.

The calculated losses to producers and consumers reflect the estimates ofsupply elasticities and the own-price and cross-price demand elasticitiescontained in EMABA (box 4 and appendix B). The various assumptionsmade for both chicken meat and egg markets in calculating producer andconsumer losses are summarised in boxes 5 and 6.

The baseline projections against which the disease and imports scenariosare compared and the main simplifying assumptions for the baselineprojections are summarised in box 6.



37Newcastle disease

Box 4: Assumptions on meat demand elasticities

The meat demand elasticities estimated in EMABA were used:

Uncompensated elasticity of demand for

Chicken Beef and Bacon andmeat veal Lamb Pork ham Mutton

With respect to a change in the price ofChicken meat –0.84 –0.02 0.23 0.22 0.06 0.77Beef and veal 0.14 –0.99 0.45 0.42 0.12 1.50Lamb 0.06 0.15 –1.35 0.18 0.05 0.63Pork 0.03 0.12 0.08 –1.58 0.02 0.28Bacon and ham 0.03 –0.05 0.11 0.09 –0.82 0.35Mutton 0.04 0.12 0.12 0.11 0.03 –2.69

For the egg industry, a long run demand elasticity of –0.82 was assumed in calculating losses to consumersand producers of eggs. Elasticities of demand for varying length of run were estimated following theapproach used for estimating similar elasticity measures for chicken meat supply (appendix B).

The worst case scenario for an outbreak of exotic Newcastle diseasediscussed above was applied to the current arrangements under whichimport restrictions are in place, and then the costs to consumers andproducers of poultry products were estimated. As pointed out by Hinchyand Fisher (1991), such estimates of the costs of a disease outbreak are validonly under strong assumptions of transition from a zero probability of adisease state with quarantine to certainty (probability = 1) of a disease statewith quarantine. Because of the uncertainty of introduction of the diseaseinto Australia under current import restrictions, the actual loss under theworst case disease outbreak could be lower than the estimates made here.

Ideally the estimated loss should be weighted by an agreed technicalassessment of the probability of entry of the disease. However, there iscurrently limited information on the probability of a disease outbreak underrestricted imports.

The short run costs of the worst case disease outbreak calculated under thestrong assumption of transition from a zero probability of a disease statewith quarantine to certainty (probability = 1) of a disease state withquarantine are presented in table 6. The estimated total loss to Australiansociety ($54 million) from a 15 per cent reduction in chicken meatproduction is equivalent to around 4 per cent of the estimated gross retailvalue of chicken meat production in 1992-93 ($1350 million). The estimated



Box 5: Assumptions on supply elasticities

The elasticity of supply of chicken meat and eggs to changes in price is often estimatedusing quarterly data, and thus the estimates correspond to a very short length of run(appendix D). Estimates of elasticity of supply to changes in price for varying lengthsof run (one year, two years and so on) are required to estimate losses and gains toproducers on a yearly basis from the short run (assumed to be one year) to theintermediate run (assumed to be five year). A five year time period is assumed to besufficient for the both chicken meat and egg supplies to adjust to a new intermediaterun equilibrium (appendix D).

It is argued that the long run supply of poultry products (and that of pig meats) is likelyto be infinitely elastic as the intensive agricultural production techniques used in theirproduction require little land, implying that there are no long run rents to producers(Anandajayasekeram, Rose and Holland 1993). However, this has been ignored bysome researchers — for example, Voon (1992) has used a long run supply elasticityof 2.0 for pork and chicken meat in an empirical study on estimating benefits ofdemand increasing research on pork and chicken meat in Australia, implicitlyassuming that there are long term rents to producers. Lamieux and Wohlgenant (1989)may have been more reasonable in assuming that pork supply is infinitely elastic inthe long run and using short and medium run supply elasticities to measure producerand consumer gains from the use of growth hormones on pigs.

An intermediate run elasticity of supply of 2.0 was selected in this study for bothchicken meat and eggs based on the range of estimates reported by other researchers(appendix D). Elasticities of supply of chicken meat and eggs to price change forvarying lengths of time to the 5th year (intermediate run) which were estimated usingthe approach outlined in appendix B are given below.

Length of run Elasticity

1 year 1.202 years 1.683 years 1.874 years 1.955 years 1.98

loss to Australian society in the egg sector ($15 million) could be 5 per centof the gross value of egg production in 1992-93 ($311 million).

As the estimates of national level producer losses were based on retail prices,they measure the total loss to all participants in the different stages of poultryproduction, value adding and distribution to the retail market. For example,in the case of chicken meat, they include the losses to breeders, contractgrowers and processors. As the farm level analysis presented in chapter 3


used prices received at the farm gate, an aggregation of farm level lossescaused by an outbreak of Newcastle disease over all the affected farmswould result in an estimate which is smaller than the estimate of producerloss given in table 6.

Contract growing of day old broiler chicken over 8 weeks to a marketableage is only a part of the vertically integrated chicken meat industry. The sumof losses in terms of reduced returns to resources over all affected contract

39Newcastle disease

Box 6: Other assumptions

Baseline quantities and pricesEMABA baseline forecasts of equilibrium quantities and chicken meat prices are usedas the benchmark (appendix B).

Assuming the volume of net egg exports is insignificant, the supply of shell eggsreaching consumers can be defined as total egg production less the quantity of eggsused for hatching (both for broiler and layer replacement chicks) and the quantity ofeggs used in the commercial processing of convenient foods such as cakes andnoodles. In this study, the quantity of shell eggs reaching consumers was estimatedby subtracting the quantity of eggs used for hatching from total egg production.However, because the quantity of eggs used by commercial food processors was notsubtracted, the estimated quantity of shell eggs reaching consumers has beenoverestimated.

The estimates of total egg production and the quantity of eggs used for hatching werederived using egg and poultry statistics published by the ABS (1991a,b,c). Eggconsumption in 1992-93 is estimated to have been 153 million dozen assuming thatconsumption per person continued to fall at the historical rate of 6 per cent a year until1996-97 and using ABARE projections of population growth. The real price of eggsin Australia rose by 14 per cent between 1986-87 and 1988-89. However, the real priceof eggs in 1992-93 is estimated to have remained at 170c/dozen.

Simplifying assumptionsEven though nonlinear (constant elasticity) supply and demand curves are used(appendix B), the supply and demand curves have been assumed to be linear in therelevant regions. This yields a good approximation for small changes in prices andquantities. This approach has been used in several other empirical studies (forexample, by Voon 1992; Lamieux and Wohlgenant 1989; Mullen, Wohlgenant andFarris 1988).

Feedback effects between egg and chicken meat sectors of the poultry industry arenot considered as the introduction of exotic Newcastle disease without imports couldaffect both sectors equally.


grower farms was just $14 million ($47 000 per farm times 291), which is31 per cent of the producer losses estimated at the retail level (appendix Atables 10 and 11). As packaging of eggs for the retail market is undertakenon most egg farms, the losses in terms of reduced returns to resourcessummed over all affected egg farms ($9 million or $79 000 per farm times118 (appendix A table 12 and 13)) was just $2 million less (or 82 per centof) the producer losses estimated at the retail level.

In addition to the difference in the price which was used as the basis for thecalculation of losses at the retail and farm level, it should be noted that thereare other limitations in comparing the producer losses presented in table 6with farm level losses aggregated over all affected farms. By assumingimplicitly that the industry supply curve is representative of the industrymarginal cost curve, the producer losses measured are based on increasesin marginal cost caused by a shift in the industry supply curve (area aij offigure D). However, farm level losses reflect changes in average farm costsand receipts not marginal costs (chapter 3).

Impacts of imports – with no diseaseIf the quarantine restrictions are relaxed, imports of fresh, frozen and cookedpoultry meat can be expected from the United States, Denmark, Thailandand New Zealand as the estimated landed price in Australia of chicken meatoriginating from these countries is less than the domestic price (Bulletin1992). The likely level of imports by 1997-98 would vary depending on anumber of factors, which are outlined in box 7.

A change in quarantine regulations is assumed, to allow an examination ofthe impact of a limited quantity of imports of chicken meat into Australia.


Net loss to Australian society of an outbreak of exotic Newcastle disease in thechicken meat and egg industries without imports in the short run In 1993 dollars

Producer Consumer Net totalloss loss a loss

$m $m $m

Chicken meat market 45 109 (100) 54Egg market 11 23 (19) 15Total poultry market 56 132 (119) 69

a Part of the loss to consumers would be a transfer to producers mainly in the unaffected region becausethe prices to both consumers and producers would increase. This transfer is given in parentheses.

6


It is also assumed that the new equilibrium price would be determined atthe landed price of imports. The supply curve would again shift to the leftwith the spread of exotic Newcastle disease; however, the domestic pricewould be maintained at the landed price of imports because imports wouldbe allowed to increase as a residual of demand and the domestic supply atthe landed import price (appendix E). It is assumed that the changes toquarantine regulations would effectively provide only limited access toimported chicken meats into the Australian market. Five levels of imports— 5000 tonnes, 10 000 tonnes, 20 000 tonnes, 40 000 tonnes and 100 000tonnes a year — have been assumed in this study.

There are two steps in estimating the costs and benefits at the national levelof introducing exotic Newcastle disease through imports. First, the apparent

41Newcastle disease

Box 7: Imports of chicken meat

The level of imports of chicken meat depends on the extent to which changes to thepresent quarantine regulations would allow exporting countries access to theAustralian market. Industry sources claim that once imports are allowed they wouldgrow to 20 per cent of domestic consumption (around 90 000 tonnes a year) in a shortperiod. This is because of the high volume and low profit margin nature of theoverseas export oriented industries. Thai poultry exports to the Japanese marketreached 20 per cent of Japanese consumption within a few years (Larkin 1991;Fairbrother 1992).

The level of Australian imports would also depend on movements in prices, exchangerates and transport costs to Australia from exporting countries. New Zealand has anadvantage over other potential exporters because of its Newcastle disease free status,close proximity to Australia and also because of its privileged position as the onlycountry currently allowed to export cooked, uncanned poultry meat to Australia.

Although Thailand enjoys an advantage over the United States and Denmark intransport costs, its exports are more likely to be contaminated with Newcastle diseasebecause of the widespread occurrence of the disease among village chickens in thatcountry. In Thailand, Newcastle disease outbreaks occur twice a year among villagepoultry (from April to May and from November to December). It is also still aproblem in semi-intensive and commercial poultry despite routine vaccination andgood sanitation (Danvivatanaporn 1987).

The United States, assisted by its Export Enhancement Program, may land productin Australian ports at relatively lower prices, while Denmark which has an exportsubsidy program may also start to export chicken meat to Australia (AustralianBusiness Monthly 1992).


net gain arising from lower domestic prices when imports are allowed isestimated, using the approaches given in appendix E. Second, the economiccost of introducing the disease to Australia is estimated and compared withthe apparent net gain estimated in the first step.

Apparent net gainApparent net gains for the five selected levels of imports were estimated fora perfectly competitive chicken meat market for varying lengths of run forsupply adjustment from the short run (one year) to the long run (five years).The EMABA chicken meat demand elasticity of 0.84 was used for both theshort and long run analysis.

The results of the analysis show that the apparent net gain in the short runfrom levels of imports up to 40 000 tonnes a year could range from $0.05million to $2.62 million a year (table 7). A much higher import level, say100 000 tonnes a year, could lead to an apparent net gain of nearly $16million a year.

In the longer run, as chicken meat producers adjust by lowering production,less new apparent net gains would be added each year to the short run (year1) apparent net gains.


Apparent net gain with imports of chicken meat In 1993 dollars

Consumer gain Producer loss Net gain

$m $m $mShort run ε = 1.20 η = –0.84

Annual imports5000 tonnes 7.72 7.67 0.0510 000 tonnes 15.44 15.27 0.1720 000 tonnes 30.91 30.25 0.6640 000 tonnes 61.95 59.33 2.62100 000 tonnes 155.82 139.84 15.98

Additional annual net gain in long run ε = 2.00 η = –0.84

Annual imports5000 tonnes 5.25 5.23 0.0210 000 tonnes 10.52 10.42 0.1020 000 tonnes 21.11 20.71 0.4040 000 tonnes 42.49 40.92 1.57100 000 tonnes 108.37 98.50 9.87

Where ε is supply elasticity and η is demand elasticity of chicken meat.

7


Impacts of disease – with importsUnder an assumed relaxation of quarantine regulations it is expected thatall imports would have to meet the quarantine specifications stipulatedbefore being allowed. Therefore, it is expected that a country such asThailand where Newcastle disease is endemic would export chicken meatof acceptable quality to Australia.

The worst case scenario of an outbreak of Newcastle disease in New SouthWales, as outlined earlier in this chapter, is considered here with importsand a 15 per cent loss in supply of chicken meat at a national level. In thiscase, the short run loss to producers ranges from $37 million a year (with5000 tonnes of imports) to $29 million a year (with 100 000 tonnes ofimports) (table 8). This is because the number of domestic broiler producersand industry output would already have been much reduced as a result ofthe lower prices received after imports were permitted.

The size of the reduction in domestic production would be directly relatedto the level of imports allowed. At a given level of imports, the longer thelength of run the lower the additional losses which would be added eachyear to the short run (year 1) producer losses.

An analysis was also conducted to estimate the costs to the egg industry ofa disease outbreak. The assumption made in chapter 3 of an 18 per cent lossin egg supply because of an outbreak of Newcastle disease is maintained.It is also assumed that the effect of lower chicken meat prices on egg

43Newcastle disease

Cost to the chicken meat industry of an outbreak of Newcastle disease, with imports of chicken meat In 1993 dollars

Producer loss

Short run Long run

ε = 1.20 η = –0.84 ε = 2.00 η = –0.84

$m $mAnnual imports5000 tonnes 37 2410 000 tonnes 36 2420 000 tonnes 35 2340 000 tonnes 34 22100 000 tonnes 29 19

Where ε is supply elasticity and η is demand elasticity of chicken meat.

8


consumption and other feedback effects between the chicken meat and eggsectors are insignificant. The estimated loss to the egg market with importsof chicken meat is therefore identical to that presented earlier.

In this study, retail prices of chicken meat and eggs are used whencalculating losses and gains to Australia. Thus, with a high degree of verticalintegration in the Australian poultry industry the estimated losses toproducers also include losses to the feed mixing, breeding, processing andother support sectors within the structure of the industry.

However, the economic impact on the game bird industry, upstreamindustries such as the feedgrain industry, and value added processing ordownstream industries such as the cooked chicken meat industry are notaccounted for in this study. These industries and the specific employmentlosses in the affected region are also likely to incur significant costs.

Further, the losses and gains to Australia as a whole have been measured inthis study using changes in the equilibrium quantities and prices in thechicken meat market that takes account of simultaneous changes in theequilibrium quantities and prices of other meat markets in Australia. Thoughthese measures fully incorporate total losses and gains to society within theAustralian meat market, there may still be some losses and/or gainsoccurring elsewhere that are also not accounted for in this study. Forexample, externalities such as the impact of the disease on wild birdpopulations would have an environmental cost that has not been taken intoaccount.



Critical probability of Newcastle disease –the balance between costs and benefits

As pointed out by Hinchy and Fisher (1991), an estimate of the total costsof disease is valid only under strong assumptions of transition from a zeroprobability of a disease state with quarantine to one of certainty (probability= 1) of a disease state with quarantine. Another implicit assumption is thatthe probability of being in a particular disease state in the next time periodwas not influenced by a given disease or no disease state in the current periodand the associated probabilities. Because of the uncertainty about anoutbreak of exotic Newcastle disease in Australia and the scale of diseasespread, the potential value of the loss could be either higher or lower thanthe estimates made here.

The estimated series of losses to Australia should be weighted by a seriesof state transition probabilities and then discounted with an appropriate rateof time preference to calculate the present value of losses. Biological modelsof disease dynamics can be helpful in obtaining such transition probabilities.For example, Johnston and Cumming (1991) have used a mathematicalmodel of the dynamics of an outbreak of Newcastle disease in villagechickens in Asia to generate state transition probabilities. Such models fallunder the general form of Markov chain models. However, there are noreliable estimates available on the probability of moving from a no diseasestate to a disease state with quarantine for Australia.

Since probability estimates of possible disease outcomes are not available,the approach used by Hinchy and Low (1990) has been used in this study(appendix F). The critical probability of disease is that level of disease riskthat would equate the sum of the present values of loss and the sum of thepresent values of apparent net gain. It is the probability at which costs equalbenefits. In this case, the critical probability is that of a disease outbreakassociated with allowing poultry meat imports where the costs from adisease outbreak do not exceed the net gains from allowing imports. If theactual probability of a disease outbreak is less than the critical probability,the gains to Australia from allowing imports of chicken meat exceed thecosts of a disease outbreak, given the assumed disease scenario.

In this analysis, the critical probability of an outbreak of exotic Newcastledisease was calculated using a two state (disease (D) and no disease (ND))

45Newcastle disease

5


Markov chain process as outlined in Hinchy and Fisher (1991) andillustrated in figure E.

The probability of disease, Pd, and probability of no disease, Pn, in time t+1depend on the state transition probabilities between time t and t+1— fromno disease state to no disease state (Pnn), from no disease state to diseasestate (Pnd), from disease state to no disease state (Pdn) and from disease stateto disease state (Pdd). These probabilities were calculated using the methodoutlined in appendix F assigning the following set of values to initialtransition probabilities:

State at time t

No disease (n) Disease (d)

State at time t+1

No disease (n) Pnn = 0.9 Pdn = 0.5

Disease (d) Pnd = 0.1 Pdd = 0.5


E Probability of disease over time

ABARE

ND

DPd

NDPn

Pn + Pd = 1

Pn + Pd = 1

Pn + Pd = 1

Pdd

Pdn

Pnd

Pnn

Pdd

Pdn

Pnd

Pnn

Pnn

Pnd

Pdn+ } = 1

Pdd

Pnn

+ } = 1Pnd

NDPn

DPd

NDPn

DPd D

Pd

NDPn

DPd

NDPn

DPd

NDPn

DPd

NDPn

Time


It should be noted that the values chosen here for Pnd is just a start value andthus does not in any way influence the outcome, or reflect any assessmentof what the actual probability of disease entry is. The critical initialprobability of disease is that level Pnd that would equate the sum of thepresent values of loss and the sum of the present values of apparent net gain.To calculate the critical probabilities, the costs and apparent net gains in allyears, and not just in the years of the outbreak as has been outlined so far,were taken into account. The real prime lending rate of 8 per cent in 1992-93 in Australia (Bartley, Penm and Warr 1993) was taken as the social rateof time preference to discount the costs and benefit streams.

The results in this study can be interpreted as showing, for different levelsof imports, the risk of disease entry which would leave Australians no worseoff than before imports were allowed. With a greater level of imports thegains to Australian consumers are larger, and so a higher degree of risk ofdisease entry can be offset against the costs to producers if there were adisease outbreak. Results are summarised for the five chosen import levelsin table 9.

The critical probability of disease increased from 0.00054 (1 in 1851) withimports of 5000 tonnes a year, to 0.33546 (1 in 3) with imports of 100 000tonnes a year. Assuming an import level of 40 000 tonnes a year, the criticalprobability of a loss of $101 million in the chicken meat sector plus a lossof $40 million in the egg sector would have to be less than 1 in 26 (forexample, 1 in 27) for imports not to impose greater costs than benefits onthe Australian economy.

47Newcastle disease

Critical initial probability of loss that would make the sum of present value (SPV) of net gain to society equal to zero a

SPV of losses SPV of gains

Chicken Egg Chicken Critical meat sector sector meat sector probability

$m $m $mAnnual imports5000 tonnes 112 40 0.13 0.0005410 000 tonnes 110 40 0.49 0.0021820 000 tonnes 107 40 1.96 0.0089640 000 tonnes 101 40 7.83 0.03829100 000 tonnes 89 40 48.61 0.33546

a The sum of net present value is calculated assuming a social rate of time preference of 8 per cent.

9


In calculating critical probabilities a value of 0.5 for the probability oftransition from disease to disease state is assumed. Given the uncertainty intransition from one disease state to another, the probability of transition fromdisease state to disease state could be either larger or smaller than the 0.5assumed. A sensitivity test on the critical probabilities given in table 9 wasconducted by recalculating critical probabilities at two other levels ofprobability of transition from disease state to disease state (0.25 and 0.75).The results of this sensitivity test (appendix F) showed that the larger(smaller) the probability of transition from disease state to disease state (Pdd)the smaller (larger) the critical probability of disease for a given level ofimports.

However, it should be emphasised that there is a considerable degree ofuncertainty around the likely cost of a disease outbreak and gains fromimports. It has been argued by Hinchy and Fisher (1991) that producers aregenerally risk averse and as a result they would be likely to assess the riskof loss from disease above its expected or average value. This implies thatproducers may, if insurance were available, be willing to pay an insurancepremium which is higher than the expected cost of a disease. As explainedabove, the critical probabilities of disease given in table 9 correspond withthose values which equate the expected or average costs to expectedbenefits. Therefore, the estimated critical probability of disease outbreakassumed risk neutrality and would represent an upper estimate for each levelof import.

In decision making under uncertainty the most frequently used decision ruleis to choose the action that minimises the risk of the worst possible outcome(Hinchy and Low 1990). This is equivalent to considering extreme riskaversion by producers. The scenario where the apparent net gains are at theirminimum, or $0.13 million, and the costs of a disease outbreak are at theirmaximum, $152 million (from imports of 5000 tonnes of chicken meat ayear), represents the worst of the five possible outcomes given in table 9.The critical probability of disease associated with this worst possibleoutcome would be much smaller than the estimated value of 0.00054 (1 in1851) if the estimate of the losses were higher than $152 million and theuncertainty about its likely value was also considered.



Farm models

49Newcastle disease

AAppendix

Farm budget of an average unaffected broiler farm in New South Wales in 1992 a

Unit value Year 1 Year 2 Year 3

c/bird $ $ $

Total number of birds picked b 302 033 302 033 302 033

Cash receiptsBroilers c 43.75 132 140 132 140 132 140

(142 711) (140 067) (139 539)Total cash receipts 132 140 132 140 132 140

(142 711) (140 067) (139 539)Cash costCasual labour 0.79 2 462 2 462 2 462Repairs and maintenance 2.11 6 576 6 576 6 576Fuel 3.21 10 005 10 005 10 005Electricity 2.16 6 732 6 732 6 732Litter 2.00 6 233 6 233 6 233Miscellaneous 0.38 1 184 1 184 1 184Interest d 15 482 14 600 13 611Overheads 4.71 14 226 14 226 14 226Total cash cost 62 901 62 018 61 030Farm cash operating surplus e 69 239 70 121 71 109

(79 810) (78 049) (78 509)Depreciation f 27 441 27 441 27 441Operator and family labour 35 338 35 338 35 338Return to capital and management g 6 460 7 342 8 330

(17 031) (15 270) (15 730)plus interest equals 15 482 14 600 13 611

Return to resources used h 21 942 21 942 21 942(32 513) (29 870) (29 341)

Rate of return to capital i 3.40 3.40 3.40(5.04) (4.63) (4.55)

CapitalShed 309 747 309 747 309 747Equipment 110 253 110 253 110 253Sundry plant 37 073 37 073 37 073Land and fixed improvements 188 000 188 000 188 000Walk in walk out value 645 073 645 073 645 073

a Without imports. The cash flow measures of an unaffected average farm in the rest of New SouthWales with disease are given within parentheses. b A mortality rate of 6 per cent is assumed.c Grower receives a fee of 43.47 cents per bird. d Calculated at 12 per cent a year on borrowingwhich was assumed to be equal to 20 per cent of walk in walk out value and payable within ten years.e The difference between total cash receipts and total cash costs. f Calculated assuming depreciationrates of 4.28 per cent for the farm shed, 10 per cent for the equipment and 8.52 per cent for sundryplant (DPIE 1991). g Defined as farm cash operating surplus less depreciation and less the imputedvalue of operator and family labour. h Defined as return to capital and management plus interest.i Return to resources used expressed as a percentage of walk in walk out value.Source of primary data: New South Wales Chicken Growers’ Council (1992).

10

RR 94.1N/APP A 12/5/05 10:21 AM Page 49

Farm budget of an average affected broiler farm in New South Wales in 1992 a

Unit cost Year 1 b Year 2 Year 3

c/bird $ $ $

Total number of birds picked c 151 017 302 033 302 033

Cash receiptsBroilers d 43.75 71 355 140 067 139 539Total cash receipts 71 355 140 067 139 539

Cash costCasual labour 0.79 1 443 2 462 2 462Repairs and maintenance 2.11 3 853 6 576 6 576Fuel 3.21 5 862 10 005 10 005Electricity 2.16 3 944 6 732 6 732Litter 2.00 3 652 6 233 6 233Miscellaneous 0.38 694 1 184 1 184Interest e 15 482 14 600 13 611Overheads 4.71 14 226 14 226 14 226Total cash cost 49 156 62 018 61 030

Farm cash operating surplus f 22 199 78 049 78 509Depreciation g 27 441 27 441 27 441Operator and family labour 35 338 35 338 35 338Return to capital and management h –40 579 15 270 15 730plus interest equals 15 482 14 600 13 611

Return to resources used i –25 098 29 870 29 341Rate of return to capital j –3.89 4.63 4.55

CapitalShed 309 747 309 747 309 747Equipment 110 253 110 253 110 253Sundry plant 37 073 37 073 37 073Land and fixed improvements 188 000 188 000 188 000Walk in walk out value 645 073 645 073 645 073

a Without imports. b Flock is destocked for five months (May to September). Operation resumedwith a new batch of placements in the next month (October). c A mortality rate of 6 per cent isassumed. d Grower receives a fee of 43.47 cents per bird. e Calculated at 12 per cent a year onborrowing which was assumed to be equal to 20 per cent of walk in walk out value and payablewithin ten years. f The difference between total cash receipts and total cash costs. g Calculatedassuming depreciation rates of 4.28 per cent for the farm shed, 10 per cent for the equipment and 8.52per cent for sundry plant (DPIE 1991). h Defined as farm cash operating surplus less depreciation andless imputed value of operator and family labour. i defined as return to capital and management plusinterest. j Return to resources used expressed as a percentage of walk in walk out value.Source of primary data: Australian Chicken Growers’ Council (1992).


11

RR 94.1N/APP A 12/5/05 10:21 AM Page 50

Farm budget of an average unaffected layer farm in New South Wales in 1992 a

Unit cost Year 1 Year 2 Year 3

c/bird $ $ $

Average number of layers b 0.64 28 250 2 8250 28 250

Cash receiptsEggs marketed c 1.52 880 270 88 0270 880 270

(959 494) (937 488) (932 205)Spent hens 0.62 3 596 3 596 3 596Total cash receipts 883 866 883 866 883 866

(963 090) (941 084) (935 802)Cash costPackaging and grading 30.78 178 524 178 524 178 524Delivery and marketing 2.5 14 500 14 500 14 500Feed costs 57.64 334 312 334 312 334 312Casual labour 5.21 30 218 30 218 30 218Pullet replacement 18.31 106 198 106 198 106 198Medication 0.06 348 348 348Electricity and water excess 0.88 5 104 5 104 5 104Repairs and maintenance 1.47 8 526 8 526 8 526Interest d 29 023 27 560 25 921Overheads 4.15 24 070 24 070 24 070Total cash cost 730 823 729 360 727 721

Farm cash operating surplus e 153 043 154 506 156 145(232 267) (211 724) (208 081)

Depreciation f 48 500 48 500 48 500Operator and family labour 24 000 24 000 24 000Return to capital and management g 80 543 82 006 83 645

(159 767) (139 224) (135 581)plus interest equals 29 023 27 560 25 921

Return to resources used h 109 566 109 566 109 566(188 790) (166 784) (161 502)

Rate of return to capital i 10.24 10.24 10.24(17.64) (15.59) (15.09)

Capital and depreciationMachinery/buildings 950 000 950 000 950 000Land and fixed improvements 120 000 120 000 120 000Walk in walk out value 1 070 000 1 070 000 1 070 000

a Cash flow measures of an unaffected average farm in rest of New South Wales with disease aregiven within parentheses. b A batch of 10 000 pullets is brought in every 17 weeks. A monthlymortality rate of 0.64 per cent is assumed in calculating average number of layers. Pullets of 18weeks of age are purchased and replaced when they are 106 weeks old. c At the rate of 246 eggs perhen housed a year. d Total interest on borrowing was calculated at 12 per cent a year. Borrowings forboth investment capital and working capital are considered. Borrowing for investment capital wasassumed to be equal to 20 per cent of walk in walk out value and payable within ten years. Borrowingfor working capital is assumed as 1 month’s feed bill maintained throughout. e The differencebetween total cash receipts and total cash costs. f Calculated assuming a depreciation rate of 5 percent for machinery, building and fixed improvements. The value of fixed improvement is assumed as$20 000. g Defined as farm cash operating surplus less depreciation and less imputed value ofoperator and family labour. h Defined as return to capital and management plus interest. i Returns toresources used expressed as a percentage of walk in walk out value.Source of primary data: Littleton and Sanders (1992); DPIE (1991).

51Newcastle disease

12

RR 94.1N/APP A 12/5/05 10:21 AM Page 51

Farm budget of an average affected layer farm in New South Wales in1992

Unit cost Year 1 Year 2 Year 3

c/bird $ $ $

Average number of layers a 0.64 11 761 28 232 28 250

Cash receiptsEggs marketed b 1.52 416 177 936 895 932 206Spent hens 0.62 300 6 071 3 596Total cash receipts 416 477 942 966 935 801

Cash costPackaging and grading 30.78 77 340 178 142 178 524Delivery and marketing 2.5 6 282 14 469 14 500Feed costs 57.64 144 830 335 097 334 312Casual labour 5.21 13 091 30 153 30 218Pullet replacement 18.31 46 007 105 971 106 198Medication 0.06 151 347 348Electricity and water excess 0.88 2 211 5 093 5 104Repairs and maintenance 1.47 3 694 8 508 8 526Interest c 27 128 27 553 25 921Overheads 4.15 24 070 24 070 24 070Total cash cost 344 803 727 903 727 721

Farm cash operating surplus d 71 674 215 064 208 081Depreciation e 48 500 48 500 48 500Operator and family labour 24 000 24 000 24 000Return to capital and management f –826 142 564 135 581plus interest equals 27 128 27 553 25 921

Return to resources used g 26 302 170 117 161 502Rate of return to capital h 2.46 15.90 15.09

Capital and depreciationMachinery/buildings 950 000 950 000 950 000Land and fixed improvements 120 000 120 000 120 000Walk in walk out value 1 070 000 1 070 000 1 070 000

a When the farm is restocked, three batches of 10 000 pullets in each are placed in three consecutivemonths assuming that the farm operators are willing to get the farm operating at full capacity as soonas possible. A monthly mortality rate of 0.64 per cent is assumed in calculating average number oflayers. Pullets of 18 weeks of age are purchased and replaced when they are 106 weeks old. b At therate of 246 eggs per hen housed a year. c Total interest on borrowing was calculated at 12 per cent ayear. Borrowings for both investment capital and working capital are considered. Borrowing forinvestment capital was assumed to be equal to 20 per cent of walk in walk out value and payablewithin ten years. Borrowing for working capital is assumed as 1 months feed bill maintainedthroughout. d The difference between total cash receipts and total cash costs. e Calculated assuming adepreciation rate of 5 per cent for machinery, building and fixed improvements. The value of fixedimprovement is assumed as $20 000. f Defined as farm cash operating surplus less depreciation andless imputed value of operator’s and family labour. g Defined as return to capital and managementplus interest. h Returns to resources used expressed as a percentage of walk in walk out value.Source of primary data: Littleton and Sanders (1992); DPIE (1991).


13

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The econometric modelling framework– use of EMABA

ABARE’s econometric model of Australian broadacre agriculture modelsdemand, supply, trade and price determinations for seven commodities ofwhich meats are the more important (see Dewbre, Shaw, Corra and Harris1985 for a detailed description). Equations have been estimated usingannual data while production adjustments by meat producers over a numberof years are captured through dynamic relationships.

The Australian poultry market component of EMABA models chicken meatdemand as a function of the price of chicken meat, prices of other meats,and three exogenous variables (consumer price index, consumptionexpenditure and population). Supply is taken to be infinitely elastic on theassumption that producers can adjust relatively quickly to within yearchanges in demand. Chicken meat price is modelled as a function of feedand other costs (Harris and Shaw 1992). An infinitely elastic short runchicken meat supply as modelled in EMABA means that there is no rent inthe short run.

Even though broiler production has an eight week production cycle, theassumption that chicken meat producers completely adjust within a yearfollowing a price change may be unrealistic. Using quarterly data for theUnited States, Chavas and Johnson (1982) found that supply is mostresponsive (with an elasticity of 0.61) at the initial broiler placement stage.Supply was somewhat responsive (with an elasticity of 0.19) after sevenmonths at the hatching stage. Very little adjustment (with an elasticity of0.06) is made as a response to price change during the next eight weekbroiler production period.

Though the entire production process takes ten months, Chavas and Johnsonfound that production adjustments in the US broiler industry would increasefrom zero in the very short run (at the very beginning) to about 95 per centof the longer term adjustment in the intermediate run (after three years) withthe long run equilibrium finally reached in about five years following a pricechange. For chicken meat supply, the longer term should be sufficiently longfor the response in investment to a change in price to be realised in termsof an adjustment in output.

53Newcastle disease

BAppendix

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The Australian chicken meat market component of EMABA was modifiedto incorporate a supply relationship with price responses for varying lengthsof run. In log-linear differential form, the supply relationship was defined as:

d(lnQst) = ε nd(lnPt) – k

where Qst is the quantity of chicken meat supplied in time t; Pt is price inyear t; k is a proportional horizontal shift in supply; and εn is the supplyelasticity with respect to change in price corresponding to the supply curvewith length of run, n, measured in years.

Following Yotopoulas and Nugent (1976), εn is defined as:

εn = ε∗(1 − (1−λ)n )

where ε∗ is the long term supply elasticity and λ is the coefficient ofadjustment.

However, it is argued that the long run supply of poultry products (and thatof pig meats) is likely to be infinitely elastic because the intensiveagricultural production techniques used in their production require littleland, implying that there are no long run rents to producers(Anandajayasekeram, Rose and Holland 1993). Therefore, for the purposeof this study e* should be considered as an intermediate run elasticity withan intermediate run adjustment in supply achieved in n years.

In the elasticity version of EMABA, chicken meat demand is defined as:

d(lnQdt) = Σi ηci d(lnPit) + Σi ψjd(lnZjt)

where Qdt is the quantity of chicken meat consumed in year t: Pit is price ofmeat i in year t; Zjt is exogenous variable j (consumer price index, populationand consumption expenditure) in year t; ηci is the elasticity of chicken meatdemand with respect to change in Pit; and ψj is elasticity of chicken meatdemand with respect to change in Zjt.

The chicken meat price determination equation in EMABA where price isassumed to be a function of feed prices and the prices of other inputs isreplaced with a competitive market clearing identity with Qmt imports,

Qst = Qdt – Qmt


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A new chicken meat supply relationship was not estimated. An intermediaterun elasticity of supply of 2.0 was selected in this study for both chickenmeat and egg based on the range of estimates reported by other researchers(appendix D). Elasticities of supply of chicken meat and eggs to pricechange for varying lengths of time to the 5th year (intermediate run) wereestimated assuming an adjustment coefficient of 0.6. Using quarterly dataand employing a Nerlovian partial adjustment model, Bhati (1987) hasestimated the adjustment coefficient for chicken meat to be 0.17. Since inthe long run a complete adjustment, , is achieved, the long runequilibrium in chicken meat supply would be obtained in around 20 quarters(five years). This confirms the finding of Chavas and Johnson (1982)reported earlier in this appendix. The coefficient of adjustment which maybe calculated using annual data should be larger than the estimate obtainedwith quarterly data. A coefficient of adjustment of 0.6 led to an almostcomplete adjustment in a five year period.

The chicken meat demand elasticities, , contained in the originalEMABA were retained and are reported in table 14.

ηci

( )1 0− =λ n

55Newcastle disease

Chicken meat demand elasticities in EMABA

ElasticityWith respect to change in price ofChicken meat –0.84Beef and veal 0.14Lamb 0.06Pork 0.03Bacon and ham 0.03Mutton 0.04

14

Baseline equilibrium price and quantity of chicken meat

Price Quantity

c/kg kt

1992 298 4551993 308 4561994 317 4851995 322 5041996 332 5181997 341 533

15

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Setting k and Qmt at zero, the modified version of EMABA was solved forendogenous variables including chicken meat price from year 1992 to 2000.The equilibrium chicken meat quantities and prices obtained from thebaseline simulation with no imports are given in table 15.

New equilibrium quantities and prices of chicken meat with a supply shiftbecause of an outbreak of exotic Newcastle disease or/and at different levelof imports were measured by setting k and Qmt at appropriate levels andsolving the model.


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Estimation of losses to consumers andproducers

The aggregate supply curve with an outbreak of exotic Newcastle diseaseis given by SS' or fijl (as in panel c of figure C).

The loss to the producers in the affected region resulting from the necessarycontraction of supply is measured by the area aij. The loss to consumersresulting from the reduction in consumption from Q to Q' and the increasein price from P0 to P1 is measured by the areas P1bjP0 plus bja. The areaP1bjP0 represents a transfer from consumers to producers mainly in theunaffected regions because of the higher price of chicken meat and eggsafter the disease outbreak, while the area bja represents the efficiency lossfrom the reduction in the equilibrium output. The total loss to Australiansociety equals the loss to the producers in the affected area plus the loss toall consumers minus the transfer from consumers to producers because ofan increase in the price of chicken meat.

The loss to producers, LP (area aij), and the loss to the consumers, LC (areasP1bjP0 plus bja), can be estimated using the following formulas:

(1) LP = 1/2 (Qkpa )

(2) LC = ΔP Q' + 0.5 ΔP ΔQ

where k is the vertical shift in the aggregate supply curve, and pa theproportion of the annual production in the affected area lost due to thedisease outbreak.

However, a part of the loss to consumers (LC) would be a transfer toproducers (TR):

(3) TR = ΔP (Q' – 0.5(Qpn – ΔQ))

where pn is the proportion of the annual aggregate production lost due to thedisease outbreak.

The total loss to Australian society, TL (areas aij plus bja), is given by:

(4) TL = LP + (LC – TRS).

57Newcastle disease

CAppendix

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The loss to producers and consumers which could be calculated as outlinedhere corresponds to the length of run (short run or intermediate run or soon) associated with the supply curve SS. The loss to producers andconsumers for different years can be estimated by using the approachoutlined by Just, Hueth and Schmitz (1982, pp. 64–7) where the loss toproducers corresponding to the one-year supply curve for the first year, thetwo-year supply curve for the second year and the three-year supply curvefor the third year and so on were calculated.

This technique has been used in other empirical studies — for example, byMullen, Wohlgenant and Farris (1988) and by Lamieux and Wohlgenant(1989). Since the losses to producers for each year are calculatedcorresponding to the supply curves of the appropriate length of run (asviewed from the very beginning of the price change), the resulting timeseries can be used for a temporal aggregation with an appropriate social rateof time preference.


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Elasticities of supply and demand

Chicken meat demand elasticitiesDemand for chicken meat has been extensively studied and the demandelasticity estimates obtained by various authors are summarised in table 16.

59Newcastle disease

DAppendix

Estimated chicken meat demand elasticities a

Own-Esti- Func- price Income

Time mation tional elas- elas-Author Country period method form ticity ticity

Using quarterly data

Bhati (1987) Australia 1971–86 TSLS Linear –0.36 0.71cMartin and Porter (1985) Australia 1962–83 Double log –0.85 2.13cFisher (1979) Australia 1962–77 FIML Double log –0.64 1.42Fisher (1979) Australia 1962–77 FIML Double logb –0.16 0.16Fisher (1979) Australia 1962–77 FIML Translog –0.63 1.48Fisher (1979) Australia 1962–77 FIML Translogb –0.23 0.20Fisher (1979) Australia 1962–77 OLS Double log –0.39 0.26cWohlgenant and Hahn (1982) USA 1965–79 HG–N Houthakker–Taylor d –0.14 0.49Wohlgenant and Hahn (1982) USA 1965–79 HG–N Houthakker–Taylor e –0.30 1.06Mues et al. (1991) Japan 1965–90 AIDS –0.35 –

Using annual data

Chen and Veeman (1991) Canada 1960–87 AIDS –0.95Chen and Veeman (1989) Canada 1960–87 OLS Double log –0.72Harris and Shaw (1992) Canada 1960–89 AIDS –0.37 0.68Chavas (1983) USA 1950–70 SUR linear –0.58 0.28Harris and Shaw (1992) USA 1960–89 AIDS –1.09 0.25Harris and Shaw (1992) Japan 1960–89 AIDS –0.54 1.10Murray (1984) Australia 1950–79 AIDS –1.10 1.30cHarris and Shaw (1992) f Australia 1960–89 OLS Double log –0.79 0.21Harris and Shaw (1992) f N Zealand 1960–89 OLS Double log –0.63 0.01Harris and Shaw (1992) f S Korea 1960–89 OLS Double log –0.54 0.41Harris and Shaw (1992) f Taiwan 1960–89 OLS Double log –1.30 0.66

a Except in Bhati (1987) the elasticity estimates were obtained from models consisting of a system ofequations for most types of meat; Bhati’s (1987) model consisted of demand and supply equationsand a market clearing identity; Wohlgenant and Hahn (1982) used monthly data. Cross-priceelasticities are not reported in this table. b Corrected for autocorrelation. c Consumption expenditure.d Short run (using monthly data). e Long run (using monthly data), f A simplified market shareapproach with the price of a particular meat relative to a weighted average price of all meats as anexplanatory variable was used. TSLS = two stage least squares. FIML = full information maximumlikelihood. OLS = ordinary least squares. HG-N = Hartley’s modified Gauss-Newton method. AIDS= almost ideal demand system.

16

RR 94.1N/APP D 12/5/05 10:19 AM Page 59

Chicken meat supply elasticitiesRelatively few studies have been undertaken to estimate the elasticity ofchicken meat supply. The chicken meat production cycle largely consists oftwo stages. The first stage involves the placement of broiler breeders to begrown to lay eggs that are subsequently hatched as broiler chicks. Adjust-ments in the production cycle to price changes mostly take place at this firststage. Broiler production in the subsequent eight week period is thereforemostly predetermined by the number of broiler chicks hatched in the firststage. Though the growing of broilers takes only eight weeks, the entireproduction cycle takes about ten months. The quarterly elasticities ofchicken meat supply reported by various authors are also presented in table 17.

Egg demand elasticitiesLike the situation with chicken meat, only a few studies have beenconducted on demand and supply elasticities for eggs. Unlike chicken meat,per person egg consumption in the United States and Australia does notappear to respond to a decrease in the real price of eggs, nor to increases inconsumption expenditure over time. In addition, increased health concernsover the cholesterol content of eggs have contributed to declining consump-tion of eggs per person. Brown and Schrader (1990) report that the absolutequarterly own-price and income elasticities of egg demand in the UnitedStates have decreased over time as more information on the adverse healthconsequences of cholesterol became available. Therefore, demand for eggsis assumed to be inelastic and to remain stable in the short run. Recentestimates of own-price elasticity of demand support this assumption. For


Chicken meat supply elasticities estimated using quarterly data

Esti- ChickenTime mation Dependant meat Feed

Author Country period method variable price price

Bhati (1987) a Australia 1971–86 TSLS Broiler production 0.90 –0.51Aradhyula and Holt (1989) c USA 1967–86 ML Broiler production 0.31 –0.06Chavas and Johnson (1982) b USA 1965–79 OLS Broiler placement d 0.61 –0.26Chavas and Johnson (1982) b USA 1965–79 OLS Testing for Pullorum 0.02 –0.12Chavas and Johnson (1982) b USA 1965–79 OLS Hatching 0.19 –0.11Chavas and Johnson (1982) b USA 1965–75 OLS Broiler production 0.06 –0.03

a The model used consisted of linear demand and supply equations and a market clearing identity.b Supply response was modelled in four stages using lagged adjustment models. Equations arespecified in linear form. c A model with a three equation supply–demand structure was used.d Breeder layers are tested for Pullorum disease prior to laying eggs which are used for hatching.TSLS = two stage least squares. ML = maximum likelihood. OLS = ordinary least squares.

17

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example, own-price elasticity estimates for the United States are –0.14 byHuang and Haidacher (1983), –0.09 by Wohlgenant (1989) and a range from–0.02 to –0.17 by Brown and Schrader (1990).

Egg supply elasticitiesThere are no published studies readily available on the elasticity of eggsupply. In this study, egg supply is assumed to be price inelastic in the shortrun because egg production in a quarter is predetermined largely by the sizeof the laying flock and the average rate of eggs produced per layer. The sizeof the laying flock is determined by the relative size and the proportion oflayers, pullets and older layers in the laying flock at the end of the previousquarter while the rate of egg production per layer is genetically determined.Short run adjustment could occur by removing older layers or by deferringthe decision to do so. Layers could remain in the flock for up to 106 weeks,which is longer than in the broiler production cycle.

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E Appendix

Estimating apparent net gain fromimports

Scenario 1: With chicken meat importsA change in quarantine regulations is assumed to allow a limited quantityof imports of chicken meat into Australia. It is also assumed that the newequilibrium price would be determined at the landed price of imports, Pm

(figure F). In this case, domestic production will contract from OQ to OQ2,consumption would increase from OQ to OQ1 and imports will meet theunsatisfied demand of Q2–Q1 at the new price.

Consumer gain is given by the area PacPm and the producer losses by thearea PabPm.

Consumer gain, CG, can be estimated using the following formula:

CG = (P–Pm)Q1 – 0.5(P–Pm)(Q1–Q)

and the producer losses by:

PL = (P–Pm)Q2 + 0.5(P–Pm)(Q–Q2)

and the net gain is given by:

NG = CG – PS.

F Effects of imports on the Australian chicken meat market

ABARE

Q2 Q1Q

D

a

c

b d

D S

S

Pm

0

P

RR 94.1N/APP E 12/5/05 10:19 AM Page 62

63Newcastle disease

Scenario 2: With chicken meat imports and anoutbreak of Newcastle diseaseUnder the scenario of an outbreak of Newcastle disease, as well as imports,the supply curve would shift to the left (from S to S' in figure G). Thedomestic price, however, would be maintained at the landed price ofimports, and imports would increase by Q3Q2. The decrease in producersurplus is given by the area feb.

Producer losses can be estimated using following formula:

PL = 1/2 [ Q2k pa)

where k is the vertical shift in the supply curve measured by the distanceeh; and pa is the proportion of the annual production in the affected area lostbecause of the disease outbreak with imports.

G Producer losses due to an outbreak of Newcastle disease, with imports

ABARE

Q1Q

D

a

lD S'S

k

hb d

ce

f

Sg

P

Q3 Q2

Pm

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F Appendix

Markov chain process

The relevant state transition probabilities are defined in the transitionprobability matrix shown below:

Transition probability matrix

State at time tNo disease (n) Disease (d)

State at time t+1No disease (n) pnn pdn

Disease (d) pnd pdd

From the general form of the Markov chain model which is described inHinchy and Fisher (1991), the probability of no disease at time t+1 can beexpressed as:

pn(t+1) = pnn * pn(t) + pdn* pd(t)

where pn(t) is the probability of no disease in time t; and pd(t) is the probabilityof disease in time t.

If the initial probabilities of the transition probability matrix are known, thetransition probabilities of either state at any future time period can beestimated using the Markov chain model. However, in this study, asestimates of probabilities of possible disease outcomes are not available, anapproach used by Hinchy and Low (1990) of calculating the critical initialprobability of disease (pnd) that would make the difference between the sumof present values of loss due to disease and the sum of present values ofapparent net gain with imports equal to zero was used.

In applying this approach to actual time series of costs and benefits, threeprocesses are followed. First, values are assigned for each of the elementsin the transition probability matrix: pdn and pdd are assumed to be 0.50, sothat (pdn + pdd = 1) and pnd or the initial (year = 0) probability of disease isgiven a start value of 0.10 (0 < pnd < 1) and thus pnn equals 0.90 (1– pnd).The probability of no disease in year 1, pn(t+1) is estimated using theexpression given above and taking last year’s (year = 0) value of pnn = 0.90for pn(t) and pnd = 0.10 for pd(t). The above expression would return a value

RR 94.1N/APP F 12/5/05 10:19 AM Page 64

of 0.86000 for pn(t+1). Probability of no disease in year 2, pn(t+2) is estimatedsimilarly but taking last year’s (year = 1) values of pn(t+1) which is 0.86000and pd(t+1) which is 0.140000. pn(t) values were estimated in this manner forfive years.

Second, the sum of present values of expected costs are derived bymultiplying the cost by the respective pd(t) [which is (1 – pn(t)] value.

Third, if the sum of the present values of benefits is greater (less) than thesum of the present values of expected cost then a larger (smaller) value thanthe start value for pnd is assumed for the initial probability of disease andcalculations repeated until the equality between the sum of present valuesof cost and the sum of present values of benefits is achieved. The initialprobability of disease pnd associated with the final solution is the criticalinitial probability.

It should be noted that in calculating critical probabilities the study assumedno knowledge of the value of Pnd while assuming a value of 0.5 for Pdn andPdd. Given the uncertainty in transition from one disease state to another,the probability of transition from disease state to disease state can be largeror smaller than the 0.5 assumed. Therefore a sensitivity test was conductedby calculating critical initial probabilities at two other levels (0.25 and 0.75)of Pdd.

The results presented below showed that the larger (smaller) the Pdd thesmaller (larger) the critical probability of disease for a given level import.

Critical initial probability at different Pdd levels

0.25 0.50 0.75Annual imports5000 tonnes 0.000674 0.00054 0.00041710 000 tonnes 0.002727 0.00218 0.00168620 000 tonnes 0.011195 0.00896 0.00654440 000 tonnes 0.047900 0.03829 0.020475100 000 tonnes 0.422938 0.33546 0.236815

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