Elasticity of demand for red meat transportation : a gravity model analysis of Western Canadian pork exports

Abstract

Canadian pork production exceeds its domestic demand and further increases can be only be sustained by successfully expanding export markets. Language, purchasing power, health awareness, proximity, values, and business relationships and NAFTA make the United States a target market for increasing Canadian pork exports. However, the flow of pork from Canada to the United States is affected positively and negatively by micro and macro factors. The major objective of this thesis is to estimate empirically the effects on Western Canadian pork exports of changes in income, hog production in the U.S. (by state) and the transport costs (truck). The goal of this study is to identify regional markets within the United States where further market penetration may be possible. The theoretical foundation of the analysis is the interregional trade model. The concepts of excess supply and demand can be utilized to derive the demand for transportation. The derived demand for transport can be estimated as a gravity model within the context of the interregional trade framework A pooled cross-section time series technique as described by Kmenta (1986), was used to estimate the gravity model. The empirical model emp?s annual data for the period of 1989 to t992. The parameters of the derived demand for transport are income, an index of production and transportation freight rates. The results show that the derived demand for the transport of pork is highly elastic and that the cost of transport is the most important factor affecting trade flows. Of the three Western Provinces taken into account in this study, Manitoba and Saskatchewan are more responsive to changes in tansport cost. The lower transport costs elasticity for Alberta may be explained by the larger gross margins and/or the lower backhaul freight rates. A change in the specialization in hog production in a U.S. state has a negative effect on Western Canadian pork exports, but perhaps less than might be expected. U.S. pork does not appear to be a perfect substitute for pork imports. The study findings suggest that Manitoba marketing efforts should concentrate in the Mid-Atlantic and West South centre states. The Alberta hog industry should focus its marketing strategy in selling on Mountain and South Atlantic states. The Saskatchewan hog industry should focus in the Mountain and Mid-Atlantic states