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Essays on Modeling the Economic Impacts of a Foreign Animal ESSAYS ON MODELING THE ECONOMIC IMPACTS OF A FOREIGN ANIMAL DISEASE ON THE UNITED STATES AGRICULTURAL SECTOR A Dissertation by AMY DEANN HAGERMAN Submitted to the Office of Graduate Studies of Texas A&M University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY December 2009 Major Subject: Agricultural Economics ESSAYS ON MODELING THE ECONOMIC IMPACTS OF A FOREIGN ANIMAL DISEASE ON THE UNITED STATES AGRICULTURAL SECTOR A Dissertation by AMY DEANN HAGERMAN Submitted to the Office of Graduate Studies of Texas A&M University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Approved by: Chair of Committee, Bruce A. McCarl Committee Members, David A. Bessler Yanhong Jin Bo Norby Head of Department, John P. Nichols December 2009 Major Subject: Agricultural Economics iii ABSTRACT Essays on Modeling the Economic Impacts of a Foreign Animal Disease on the United States Agricultural Sector. (December 2009) Amy DeAnn Hagerman, B.S., Oklahoma State University; M.S., Texas A&M University Chair of Advisory Committee: Dr. Bruce A. McCarl Foreign animal disease can cause serious damage to the United States (US) agricultural sector and foot-and-mouth disease (FMD), in particular, poses a serious threat. FMD causes death and reduced fecundity in infected animals, as well as significant economic consequences. FMD damages can likely be reduced through implementing pre-planned response strategies. Empirical studies have evaluated the economic consequences of alternative strategies, but typically employ simplified models. This dissertation seeks to improve US preparedness for avoiding and/or responding to an animal disease outbreak by addressing three issues related to strategy assessment in the context of FMD: integrated multi region economic and epidemic evaluation, inclusion of risk, and information uncertainty. An integrated economic/epidemic evaluation is done to examine the impact of various control strategies. This is done by combining a stochastic, spatial FMD simulation model with a national level, regionally disaggregated agricultural sector mathematical programming economic model. In the analysis, strategies are examined in the context of California's dairy industry. Alternative vaccination, disease detection and movement restriction strategies are considered as are trade restrictions. The results reported include epidemic impacts, national economic impacts, prices, regional producer impacts, and disease control costs under the alternative strategies. Results suggest that, including trade restrictions, the median national loss from the disease outbreak is as much as $17 billion iv when feed can enter the movement restriction zone. Early detection reduces the median loss and the standard deviation of losses. Vaccination does not reduce the median disease loss, but does have a smaller standard deviation of loss which would indicate it is a risk reducing strategy. Risk in foreign animal disease outbreaks is present from several sources; however, studies comparing alternative control strategies assume risk neutrality. In reality, there will be a desire to minimize the national loss as well as minimize the chance of an extreme outcome from the disease (i.e. risk aversion). We perform analysis on FMD control strategies using breakeven risk aversion coefficients in the context of an outbreak in the Texas High Plains. Results suggest that vaccination while not reducing average losses is a risk reducing strategy. Another issue related to risk and uncertainty is the response of consumers and domestic markets to the presence of FMD. Using a highly publicized possible FMD outbreak in Kansas that did not turn out to be true, we examine the role of information uncertainty in futures market response. Results suggest that livestock futures markets respond to adverse information even when that information is untrue. Furthermore, the existence of herding behavior and potential for momentum trading exaggerate the impact of information uncertainty related to animal disease. v DEDICATION For my husband: my rock and the keeper of my sanity For my unborn child: my reason to hope for a brighter future vi ACKNOWLEDGEMENTS I would like to thank my committee chair, Dr. Bruce McCarl, for the opportunities he has provided me and for his guidance through the past two and a half years. I have grown as a researcher and as a person under his mentorship and hope I can earn the right someday to be called his peer. I would also like the thank Dr. Yanhong Jin for her encouragement and advice throughout this journey; Dr. David Bessler for providing thoughtful and insightful guidance as to what it means to be a true researcher through both my Masters and Doctoral programs; and Dr. Bo Norby for being a voice of practical knowledge and encouragement during my crash course in epidemiology. Thanks also to Vicki Heard and Dee Cochran who have both helped me through the jungle of paperwork required to get to this point. Finally, my thanks go out to all of the other professors and support staff in our Agricultural Economics Department who have made my entire graduate experience excellent. I have truly felt a part of the departmental family. Thanks also to the Department of Homeland Security funded National Center for Foreign Animal and Zoonotic Disease Defense at Texas A&M, for support both financially and personally. Specifically I would like to thank Gary Snowder and Neville Clark for their support of my research efforts and the opportunity to present this research to a diverse audience. I would also like to thank the following individuals: Tim Carpenter and Josh O'Brien from UC Davis for the use of the Davis Animal Disease Spread Model and explaining its operation to me. Michael Ward of the University of Sydney and Linda Highfield for the use of the AusSpread model and repeatedly explaining basic principles of epidemiology. Monica Galli, with whom I first began exploring the issues of movement restriction impacts on dairies. Johnny Lin, who has been my co-author on the integration of risk attitude in economic analysis and Bart Fischer, who provided an experienced editing eye during my writing process. vii NOMENCLATURE FAD Foreign animal disease FMD Foot-and-mouth disease GSD Generalized stochastic dominance BRAC Breakeven risk aversion coefficient OIE World Organization for Animal Health FAO Food and Agriculture Organization WAHID World Animal Health Information Database IP Infection Point viii TABLE OF CONTENTS Page ABSTRACT .............................................................................................................. iii DEDICATION .......................................................................................................... v ACKNOWLEDGEMENTS ...................................................................................... vi NOMENCLATURE .................................................................................................. vii TABLE OF CONTENTS .......................................................................................... viii LIST OF FIGURES ................................................................................................... x LIST OF TABLES .................................................................................................... xiii 1. INTRODUCTION ............................................................................................ 1 1.1 Dissertation Objectives and Procedures ............................................. 2 1.2 Plan of Dissertation ............................................................................ 3 2. ESSAY 1: OVERVIEW OF FMD ISSUE AND ECONOMICS ..................... 6 2.1 FMD as an Economic Disease: The 2001 UK Outbreak.................... 7 2.2 Background on FMD .......................................................................... 11 2.3 FMD in the United States ................................................................... 15 2.4 Strategies for Eradicating FMD ......................................................... 24 2.5 Eradicated versus Endemic FMD ....................................................... 32 2.6 Conclusion .......................................................................................... 33 3. ESSAY 2: COMBINING EPIDEMIC AND ECONOMIC MODELS IN A SECTORAL ANALYSIS FRAMEWORK ..................................................... 34 3.1 Introduction ......................................................................................... 34 3.2 Economic/Epidemic Model Development .......................................... 34 3.3 General Framework ............................................................................. 51 3.4 Modeling Combined Economic/Epidemic Studies ............................. 61 3.5 Additional Economic Modules ............................................................ 78 3.6 Summary ............................................................................................. 79 ix Page 4. ESSAY 3: A CASE STUDY IN LINKING FMD EPIDEMIC MODELS WITH THE ASM MODEL—THE DADS-ASM INTEGRATION APPLICATION IN THE CENTRAL VALLEY CALIFORNIA DAIRY REGION ........................................................................................................... 80 4.1 Introduction ......................................................................................... 80 4.2 Background on California Livestock Agriculture ............................... 80 4.3 Study Design ......................................................................................
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