How Scary are Food Scares? Evidence from Animal Disease Outbreaks

Summary

This research investigates the return and volatility patterns in live cattle and lean hog futures markets following BSE and H1N1 outbreaks by modeling time-varying volatility and spillover effects between these substitute commodities.

Situation

Food scares result in severe economic losses in areas of finance, consumption, production, and trade. The H1N1 outbreak yielded a $200 million market revenue loss for the pork industry over a four-month span, while the 2003 BSE outbreak in the U.S. significantly reduced beef sales for nearly three months. The unpredictable behavior of livestock markets has made decision-making difficult for market participants. Unanticipated events, such as disease outbreaks, have only increased this volatile behavior, thus increasing risk. However, while policies and regulations have been strengthened for preventing recurrence of "known" disease outbreaks, the "new" diseases present an ongoing threat to society and the economy. In addition, as the effects of a policy change would be much broader than expected in the case of interrelated markets, policymakers need to account for market spillovers in designing policies.

Response

This study investigates live cattle and lean hog futures returns and their volatility following three North American BSE cases and one H1N1 flu event by allowing volatility spillover effects between these two livestock markets, as they are substitutes in demand and compete in the usage of feedstuffs. A multivariate GARCH system that allows shocks in one market to affect the variance of the other market is estimates to test for spillover effects. Both nearby and deferred maturities of futures contracts are analyzed to understand the time horizon of the outbreak impacts.

Impact

The findings show that food scares contribute to market uncertainty and sharp price fluctuations in livestock futures markets with decreasing returns and increasing volatility. For nearby contracts, the impact of the first BSE outbreak in the U.S. and the 2009 H1N1 flu on returns lasted even after 30 days. As for the volatility, the first BSE case in the U.S. had the strongest effect on nearby cattle variance; and the H1N1 flu had the largest impact on deferred lean hog variance. Volatility in the nearby hog futures market is found to lower the volatility in the live cattle market, indicating that uncertainty in one market stabilized fluctuations in a substitute commodity, consistent with traders anticipating higher demand in a substitute commodity during a serious food scare.

State Issue

Other Programming

Details

• Year: 2020
• Geographic Scope: National
• County: Clarke
• Location: College Station, Athens
• Program Areas:
  • Agriculture & Natural Resources