The Effect of Foot and Mouth Disease on Trade and Prices in International Beef Markets

The paper develops and uses a two step quantitative model to analyze the effect of Foot and Mouth Disease (FMD) on international beef markets over time. Using monthly data from 1990-2002 for 7 major beef exporters and for 22 major beef importers, we use a probit equation to estimate the probability that country i exports to country j, taking account of foot and mouth status of exporter, sanitary policy of importer, beef quality, trade preferences, distance, and other factors affecting whether beef trade occurs. We then use OLS to estimate the export prices that are obtained for beef, taking account of beef quality, country per capita, trading preferences, region, per capita income, and a time trend, including terms to adjust for censorship in the first stage. Using the estimated equations, we compare the predicted change in trading partners and in the prices received by the two exporters in our sample that are not FMD free, Brazil and Uruguay, under the assumption that their status switches from having FMD to being FMD free. The model performs well. The results suggest that FMD continues to impede trade between many countries and does accordingly reduce the price received for beef from countries with FMD. Nonetheless, the "sanction" from FMD appears smaller than previously believed.