Environmental Regulation and Implications for the U.S. Hog and Pork Industries

Abstract

This study examines the effect of increasing environmentalregulation on hog production in the U.S. domestic market and on thecompetitiveness of U.S. pork in the international market. Agriculturalpollution from animal feeding operations (AFOs) is becoming a majorenvironmental consideration in the high hog production regions of the UnitedStates as well as in the heavy production areas of Northern Europe. Asenvironmental concerns increase and governmental regulations are imposed toprotect the environmental quality in these areas, will there be changes inproduction signaling an increase in competitiveness for regions with more laxenvironmental regulatory standards? This is an important question for theU.S. hog and pork industries from both a domestic (interstate) and aninternational perspective.The first half of this study examines differences in U.S. state water qualityregulations and their influence on the location of hog production in theUnited States. Modeling the profit maximization decision of hog producersallows investigation as to whether or not the current changes in theindustry towards larger and more geographically concentrated operations havebeen influenced by differences in environmental regulation. This analysis isconducted separately on small and large operations in order to allowexamination of the differences in the regulatory effect by size of operation.The results of this analysis provide evidence that environmental compliancecosts are significant for small hog feeding operations, while hog productionon large operations does not seem to be influenced by the level ofenvironmental stringency. Implications for policy making include the factthat the observed movement of large hog operations out of traditionalmid-western states is not primarily a consequence of differences inenvironmental regulation and, therefore, current policy proposals calling forharmonized Federal AFO manure management standards may not be necessary.Also, policy makers concerned with the economic and social implications ofdecreasing small farm production will want to consider the detrimentaleffects of increasing environmental regulation on these small producers.The second half of the study examines the effects of increasing U.S. andEuropean Union (EU) environmental regulation on the competitiveness of theU.S. pork exporting industry. An equilibrium displacement model is developedto estimate the magnitude of the effect on U.S. pork export quantities andalso to calculate producer welfare changes. A review of information on theenvironmental regulation imposed on the major pork exporters is provided asbackground to the current policy environment in each of these countries.Results show that the expected increase in U.S. hog producers' compliancecosts lead to only minor losses in competitiveness for the U.S. porkindustry and in fact it is the hog producers, not the pork processors, whobear the majority of the economic loss. Changes in EU environmentalregulation over the next few years are expected to be more restrictive thanthose imposed in the United States. Examining these changes in EU regulationshows that over a range of EU regulatory scenarios, U.S. pork becomes morecompetitive as EU pork prices increase significantly in the face of verystringent EU environmental regulation. Future trade policy implications ofthese results include the need of EU countries to negotiate harmonizedenvironmental standards to equate environmental compliance costs acrossmajor pork exporting countries.