Exact date of working paper unknown.Because of potential health hazards, the USDA may ban nitrite use in the meat processing industry. A nitrite ban without an alternative substitute may cause disequilibrium within the meat industry. Farmers and meat processors will sustain increased costs as they transfer resources from one enterprise to another

Baldwin, E. Dean

Van Stavern, Bobby D.

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•• ' ECONOMIC CONSEQUENCES OF A NITRITE BAN ON U.S. AND OHIO HOG FARMERS (An Analysis For Extension Audiences) * E. Dean Baldwin and Bobby D. Van Stavern ESO 517 Because of potential health hazards, the USDA may ban nitrite use in the meat processing industry. A nitrite ban without an alternative substitute may cause disequilibrium within the meat industry. Farmers and meat processors will substain increased costs as they transfer resources from one enterprise to another. *E. Dean Baldwin is Assistant Professor of Agricultural Economics and Bobby D. Van Stavern is Professor, Department of Animal Science, Ohio State University, Columbus, Ohio. \ . • ECONOMIC CONSEQUENCES OF A NITRITE BAN ON U.S. AND OHIO HOG FARMERS (An Analysis for Extension Audiences) E. Dean Baldwin and Bobby D. Van Stavern Introduction In a 1970 article appearing in Nature, Drs. William Lijinsky and Samuel Epstein called for a reduction or removal of nitrites from the diet (3). These authors cited the possible reaction of nitrite with aminines to form nitrosamines as a potential human health hazard. In testimony before the Senate Subconunittee on Executive Reorganization and Government Research of the Conunittee on Government Operations, these and other scientists testified that nitrites could cause mutations and cancer in man. Other scientists have claimed that 1/ nitrites may cause headaches, changes in brain wages, and death. Because of these accusations, the USDA may ban the use of nitrites in the processing of meats. USDA is concentrating its investigation on the bacon industry, which makes the widest use of sodium nitrite. Bacon manufacturers must demonstrate that the use of nitrites will not result in the formation of carcinogenic nitrosamines in any sample of bacon that is prepared for food. To date, heating bacon to 350 degrees results in 20 parts per billion of nitro-samines in some samples (6). Problem Nitrites were used initially to process meat and to prevent the formation of botulism spores, a deadly poison. Secondary effects of nitrites were 1/ Notice of Proposed Rule Making - Nitrate, Nitrites and Salt - USDA Annual and Plant Health Inspection Service (9CFR Parts 318 and 381). -2-identified after the turn of the century. The red color of cured meat including~ bacon was found by Kisskalt to be formed in the presence of nitrite. Chemists and meat scientists determined that meat flavor changes were linked to nitrite 2/ oxide, which was formed from nitrite during the curing process. Research linking cancer in man to nitrites was initiated in the 1960's. During the last decade, the industry has participated with the FDA and USDA to define the nature and danger of nitrites and to determine substitutes which will reduce 3/ the cancer dangers to man. Based on investigations by the meat industry, it is concluded that a real and viable alternative to nitrites is likely to be found, but it appears that the marketability of such a product is six to ten years in the future. The substitute product should maintain the color, texture, and taste of bacon and must prevent the growth of botulism spores. Salting, dessication, freezing, heating, irradiation, and chemical technologies do not meet the above requirement~ If a viable substitute is not available and nitrites are banned, bacon may disappear from the grocery shelves. Pork bellies which were used in the bacon curing process would be diverted as trimmings for sausage [6]. Unless consumers would directly substitute sausage for bacon, sausage prices and prices paid to farmers would decline and hog production would decrease. Since a third of the corn produced in the United States is fed to hogs, a prohibition on nitrites would be in the longer term decrease the demand for corn. Banning of nitrites will affect the economic activitv and choices of consumers, retailers, wholesalers, processors, and producers. 2/ ~otice of Proposed Rule }mking - Ibid (9CFR, Parts 318 and 381). 3/ Statement by Dr. John 3irdsall, Director of Scientific Activities, A~! to Senate Small Business Committee, Januarv 14, 1977. ' -3-Objectives and Methodology To clarify the proposed loss for extension audiences, this paper specifies an economic and analytical framework for analyzing the impact of the ban on the U.S. and Ohio farm sectors. A theoretical analysis is used to explain the economic impact of the ban on U.S. and Ohio swine producers. Supply and demand elasticities and formulas are incorporated into the analysis to evaluate changes in farm prices, total revenues, and hog supplies [7]. The analysis also provides implications for consumers. The following assumptions were specified: 1. Nitrites are banned and there are no viable substitutes. 2. Bacon disappears from the grocery shelf. 3. All pork bellies are processed into sausage. 4. The elimination of one pound of bacon increases the supply of sausage by 0.9 pounds. 4/ 5. The demand elasticity for pork products is -.75 [2]. 6. The supply elasticity at the farm level is .4 [2]. 7. Sausage and fresh pork products are not perfect substitutes for bacon. Thus consumers will consume more sausage and other pork products only at lower prices. 8. Pure competition exists at the farm level. Theoretical Considerations The price of live hogs is determined by supply and demand. Prior to the banning of nitrites, assume the market is in equilibrium at a price of $40/cwt. and a production level of Q (Figure lB). Each firm is earning a normal profit at the point where the marginal cost (MC) and average cost (AC) curves inter-sect the average revenue (AR) and marginal revenue (MR) curves (Figure lA). 4/ George, P. S., et. al., "Consumer Demand for Food Commodities in the United States With Projections for 1980," Giannini Foundation Monogram 26, pp. 46-51. $/<WI' A ql q AR MR B O:L Q FIGURE 1. Equilibrium in Hog Ma.rket and at Finn After Nitrites are Banned From Bacon Process: Short ard IDng Term vlith Constant Costs l +' I \ ' • -5-Markets and Short Run Effects In the market period, the supply curve is perfectly inelastic and is represented as QS in Figure lB. When the nitrite ban is instituted, the supply of trimmings increase and the price of pork bellies decrease. As a result the derived demand curve shifts from D1 to D2 (Figure lB). A new market equilibrium would be established where D2 intersects the supply curve QS. The market would establish a lower price, $35/cwt., and quantity Q would be traded in the market. Each firm would produce quantity q and would sustain a loss a-b (Figure lA) or $5/cwt. During the short run, firms will minimize costs by decreasing production. In this example, the firm will reduce production from q to q1 (Figure lA), resulting in a smaller supply of hogs in the market Q1 (Figure lB). This in turn results in a price between $40 and $35/cwt. Losses to each firm are ~ reduced and now equal al-bl. The Long Term Constant Cost Effect Because economic losses exist, a1-b1 , firms will exit from the industry. This causes the supply curve to shift from s1 to s2 (Figure lB). The long term adjustments continue until the firms are earning normal profits. Pro-duction decreases to Q2 , price increases to $40/cwt., each firm produces quantity q, total revenue earned from the hog industry declines, the number of hog firms decreases, demand for grain and other feed inputs declines. The Long Term Changing Cost Effect At the time firms exit from the industry, costs could begin to decrease, reflecting the decrease in the demand for feed grains and ingredients. In this case, the average cost (AC) and marginal cost (MC) curves would shift downward and to the right (Figure 2A). If the curves shifted to AC 2 and xc2 , a new equilibrium is established in the market. Farmers produce quantity q s / q I q Q A B F rcuru: 2. L1uili brium in hog market and at firm after ni t:r1.tes ar2 banned from 0acon process: Short anJ lon); term with Lhanging costs. I CJ'\ I . ' ' -7-(Figure 2A) at a price between $35 and $50/cwt. Quantity Q2 would be traded in the market (Figure 2B). Each firm would earn a normal profit. Costs, prices, number of hog firms, total supply of pork, and total revenues decrease. Demand for grain and other feed inputs decreases. Empirical Results Prior to the ban 1978, hog producers in the U.S. and in Ohio produced 5/ 19.5 billion and 950 million live-weight pounds of pork, respectively (Table 1). In the U.S., 4.8 billion pounds of sausage and 1.4 billion pounds of bacon are manufactured. Ohio farmers contribute 220 million pounds of sausage and 65 million pounds of bacon to the U.S. totals. Prices paid to farmers are expected to range between $38 and $42 for the year [1,4,5). Based on this price, total revenues in the United States would equal $7.8 billion. In Ohio, total revenues would equal $380 million. Effect of Ban in Market and Short Run Periods Since farrow to finish is approximately six months, producers cannot change production during the first half of the year (market period). It is assumed that the short run constitutes an additional six months. In the second year of the ban, firms are permitted to exit from the industry, the long run. During the market period, the supply of trinunings once used for bacon are diverted into sausage representing a 24 percent increase (Table 1). 6/ Assuming a demand elasticity of -.75 , the price of trimmings decline from $0.49/lb. [5] to $0.16. Because pork bellies represent 15% of the carcass weight, price paid to farmers decreases to $35/cwt. in the market period. 5/ Economic data derived from Livestock and Meat Statistics, Agricultural Statistics 1977 and Hadley [1,4,5]. Technical meat processing data from on going research, Dr. Bobby Van Stavern, Department of Animal Science, Ohio State University. 6/ The -.413 elasticity as estimated by George and King indicates a lower price for trimmings. -8-TABLE 1. Estimated Farm Value of Pork Production in Cnited States and in Ohio 1978 (Base Estimates) 1 Pounds of Pork (live wt-mil. pounds) Sausage (mil. pounds) Bacon (mil. pounds) farm Value 2 Dollars/cwt Mil. dollars (based on $40/cwt) u.s. 1 19500 48503 13703 38-42 7800 Ohio 38-42 380 11976 Data as reprinted in Livestock and Meat Statistics, Statistical Bulletin No. 522, USDA, June 1977, times an expected 12 ?ercent increase (Hadley, Herbert, Economic Information for the Ser:ice Enterprise, Department of Agricultural Economics, Ohio State rniversity, ESO 478, March 1978. ') -Hadley, Herbert, Economic Information for the Service Enter-prise, Department of Agricultural Economics, Ohio St~te University, ESO ~78, March 1978. 3"Does not represent total production as a product may be i~s~ected more than once," Agricultural Statistics 1977, CSDA, 1977. ~Estisated based on national average ti~es pounds of pork ?roC.cict in Ohio. '' I -9-~ In the short run, there is a decrease in the quantity of hogs supplied, • pork production decreases to 1.85 billion pounds in the U.S. and to 903 million in Ohio, a five percent decrease in supply of pork (Table 2). Based on a supply elasticity of .4, farm prices equalize at $37/cwt. Swine producers in the U.S. generate $6.7 billion of total revenue, a decrease of 14.5%. In Ohio, farmers generate $325 million of total revenue. Effect of Ban in Long Run Constant Cost Assuming the $35-$37/cwt. price creates a $35 cwt. loss for each hog producers, firms exit from the industry. To reestablish a $40/cwt. average marketing price, the demand elasticity of -.75 causes production to decline by ten percent to 17.6 billion pounds in the U.S. (Table 3). Ohio farmers produce 855 million pounds of pork. Tilis indicates that as many as ten percent of the swine firms could exit from the industry. Because of the decrease in supply, swine producers in the U.S. forego $780 million in total revenue annually. In Ohio, total revenue decreases by $38 million annually, an annual ten percent decrease. Conclusions and Implications The benefits and costs associated with the nitrite policy ban are summarized in Table 4. A nitrite ban without an alternative substitute or process creates many disequilibriums within the meat and livestock industries. The price of meat trimmings and prices paid to farmers vary. The supply of pork and total farm revenues from the swine enterprise decline. The analysis implies a decrease in demand for feed grains and other feed ingredients. Thus other enterprises within the farm sectors will be affected. The analysis also implies an adjust-~ ment in production and employment in the meat processing industry. Because bacon disappears from the grocery shelf, consumers lose some freedom of choice. TABLE 2. Estimated Changes in Farm Value of Pork Production Assuming Nitrites are not Used to Process Bacon, United States and Ohio Market Period UNITED STATES Absolute Percentage Change From Change From 1978 Base 1978 Base Year1 Year1 --~----- --·-··-----------~ Pounds of Pork 2 Live weight (mil. of pounds) 18S2S 97S -s 903 Sausage (million of pounds) 3 6022 +1172 +24 27S Bacon (mil lion of pounds) 3 0 -1370 -100 0 Farm Va luL· 4 Dollars/cwt. $3S-3 7 -3 to 5 -7. s to 12.S 3S-37 Millions of dollars 6669 -1131 -14.S 325 OHIO Absolute Change From 1978 Base Yearl 47 +SS -6S -3 to 5 -55 lthe absolute and percentage changes demand by taking difference from the estimates Table 1. Percentage Change From 1978 Base Yearl -5 +25 -100 -7.5 to 12.5 -14.5 21976 data as reported in ~ivestock and Meat Statistics, Statistical Bulletin No. S22, USDA, June 1977, times an expected 12 percent increase (Herbert Hadley, Economic Information For the Swine Enterprise, Department of Agricultural Economics, Ohio State University, ESO 478, March 1978). 31t is assumed that the all belly is processed into sausage products. With a conversion of .9. 41t w;is as~~unied that ll1e elasticity of demand is -.7S, Brandow, G. E., Interrelations Among Demands . "'- F<~_r_n~ _P_r_:_o_ci_u_l~L_s _ _;1_1_i_d __ l_1~lementa_!:_,!:_~ _ _f_o_~ __ Control of Market Supply, The Pennsylvania State University, Bulletin .;HU, Au>~usl L<)()l. Lt was assumed that each hog dressed at 26 pounds of belly, study completed by Dr. Bobby V<.mStaven1, Department of Animal Science, Ohio State University, 1978, 10-12 pound bellies used for bacon roll for 63.4c/lb. and 50% lean for sausage roll for 49c/lb. I I-' 0 I TJ\UI.E 'L Est imate<l Ch<mges in Farm Val uc of Pork Production Assuming Nitrates are Not Used to Process Bacon and Farmers React to Price Change, United States and Ohio Long Term ---·-··· ... ----·-··- ------·· -=----=--·--=·--_·---=-=-==.::-:::..: :::.::=:.:.~==---··-:::== .: ::-::- -----·-·-·--·---·· ================== Pounds of Pork 2 Live weight (mil. of pounds) Sausage (mil. pounds) Bacon (mil. pounds) Farm Value Dollars/cwt Millions of dollars 17550 5475 0 40 7020 UNITED STATES Absolute 1 Change From 1950 +625 -1370 0 780 1 Percentage ·Change 10 +12 -100 0 -10 1 The absolute and percentage changes derived by taking difference from the 855 250 0 40 342 OHIO 1 Absolute Change 95 +30 -65 0 -38 estimates Table 1. 1 Percentage Change 10 +13 -100 0 -10 2Assuming a supply elasticity of .4 and a demand elasticity of . 75, supply could decrease by 10 percent to reestablish an equality price of $40.00. If demand elasticity was less than .75, then supply would decrease even more. I ..... ..... I -12-TABLE 4. Summary of the Costs and Benefits from the Elimination of Nitrites in the Bacon Manufacturing Process Costs 1. Less total revenue from swine farms 2. Possible depressed grain prices 3. Less choice for consumers at the meat counter 4. Loss of export markets for pork 5. Possibly less employment in meat packing, distri-bution and retailing businesses Benefits 1. Possible reduction in the risk of cancer 2. Possible reduction in other diet-related diseases 3. Possibly more grain to be processed into human foods 4. Possible increases in grain exports Because the benefits of improved human health are invaluable and un-measurable, society will continue to press for improved diets. Meat scientists and chemists must develop improved techniques for measuring the causal relationships between diet and human diseases. Since a nitrite ban is a possibility, and market disequilibrium will result, meat scientists should in~rove the accuracy of the nitrite measuring devices. In addition, alterna-tive substitutes for nitrites should be developed as rapidly as possible. ', • • r ! -13-' t REFERENCES 1. Agricultural Statistics 1977, U.S.D.A., Washington, D. C., 1977. 2. Brandow, G. E., Interrelations Among Demands For Farm Products and Implications For Control of Market Supply, Bulletin 680, Pennsylvania State University, College of Agriculture, August 1961. 3. Fiddler, W., et. al., "The Effect of Sodium Nitrite on the Flavor of Frankfurters," Journal of Food Science, Applied Science and Engineering, Vol. 37, 1972, pages 668-670. 4. Hadley, Herbert H., Economic Information for the Swine Enterprise, ES0-478, Department of Agricultural Economics, Ohio State University, ~!arch 1978. 5. Livestock and Meat Statistics, Statistical Bulletin No. 522, Supplement For 1976, U.S.D.A., Economic Research Service, Washington, D. C., June 1977. 6. Madsen, H. C., "Impact of the Loss of Nitrites of Animal Agriculture," Proceedings of the Meat Industrv Research Conference, pages 35-40, American Meat Institute Foundation, Arlington, Virginia, ~larch 1976. 7. ~lathews, Tim L., "Soybean Model With Forcasts for the Period 1976-75 to 1977-78," (Mimeograph copy), December 2, 1974. 

Economic Consequences of a Nitrate Ban on U.S. and Ohio Hog Farmers

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Economic Consequences of a Nitrate Ban on U.S. and Ohio Hog Farmers

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