The North American Hog and Pork Industry: Implications of a Countervailing Duty on Pork

Abstract

During the late 1980s, the National Pork Producers Council (NPPC) in the United States lobbied for and received a countervailing duty (CVD) on pork entering the United States from Canada. The justification for the NPPC's lobby efforts was that the subsidization of Canadian pork production led to more pork entering the U.S. market, which in turn injured U.S. producers. Thus, the NPPC argued that the imposition of a CVD on pork entering the United States would offset the subsidy and counter the damaging effects of the subsidy to the U.S. market. The thinking behind this assumes that a CVD on pork entering the United States would lead to higher U.S. hog prices and, thus, higher revenues for producers. However, the CVD on U.S. hogs causes a shift of the farm-level demand in both Canada and the United States. The shifts in farm-level demand cause shifts of the excess hog demand and excess hog supply curves which intersect to establish the North American hog price. It is the relative magnitude of these shifts which determines whether hog price goes up or down. As shown in figure 1, if Canadian excess supply shifts right more than U.S. excess demand shifts right, then the hog price will drop. Conversely, if Canadian excess supply shifts less than U.S. excess demand, then hog prices will rise. This paper will attempt to determine which scenario is correct and whether or not U.S. producers gained from the imposition of the CVD on pork entering the U.S. from Canada. Figure 2 presents the theoretical framework for the model. This model is an adaptation of a simultaneous equations model originally estimated by Meilke and Scally. Equations were estimated for farm-level supply and demand and retail demand for Canada and the United States. As well, equations linking the Canadian and American prices of hogs and pork were estimated. The empirical observations for the supply and demand equations started with first quarter, 1969, and concluded with fourth quarter, 1987. Because exports of pork from Canada to the United States did not become significant until the late 1970s, the price linkage equations were estimated over a sample period of 1980: 1 to 1987:4.