Finding the way out to African swine fever: Analysis of Chinese government’s subsidy programs to farms and consumers

doi:10.1016/j.cie.2021.107543

Computers & Industrial Engineering

Volume 160, October 2021, 107543

https://doi.org/10.1016/j.cie.2021.107543 Get rights and content

Highlights

•
Develop a game-theoretic framework to characterize the government’s ASF subsidy programs.
•
Derive the optimal subsidy programs based on the government’s emphasis on different stakeholders.
•
Prove the equivalency of the PS and RS regarding improving the social welfare.
•
Analyze the impacts of breeding capacity constraint, yields correlations and farms competition.

Abstract

African swine fever (ASF) has eliminated a third of China’s pig population since August 2018 and lifted pork prices to record levels. To rebuild the supply of the country’s staple meat and maintain social stability, the Chinese government is offering subsidies to farms (the compulsory culling subsidy, CCS) and consumers (the price subsidy, PS, or the revenue subsidy, RS). To gain a better understanding about how these subsidy programs impact different stakeholders and facilitate pork supply recovery, we develop a game-theoretic framework to analyze the government’s optimal subsidy programs under different settings. Our analysis generates the following insights: (i) The PS and RS are equivalent in terms of improving different stakeholders’ welfare. (ii) The optimal subsidy program evolves from subsidizing farms only (SF) to subsidizing both farms and consumers (SB) and, finally, to subsidizing consumers only (SC) as the government emphasizes more on consumer welfare. (iii) If a farm is confronted with the breeding capacity shortage problem, in addition to the government’s relative emphasis on different stakeholders, the optimal subsidy program is jointly decided by two thresholds regarding the breeding capacity and subsidy budget, respectively. (iv) If the farms’ yields are partially correlated, offering subsidies may discourage their production enthusiasm and reduce their profits. Specially, the SC policy dominates the highly correlated case and the structure of the optimal subsidy programs in the lowly and moderately correlated cases is characterized. (v) If there are multiple farms competing in the market, the SF (SC) policy is optimal when the government emphasizes more on farms’ profits (consumer welfare); otherwise, the SB (SF) policy is optimal if the subsidy budget is large (small) while the total number of the farms is small (large).

Introduction

China is the world’s largest pork producer and consumer, the country’s hog production accounts for approximately half of the world’s total production, and pork accounts for 62.7% of Chinese residents’ meat consumption. After the first outbreak of African swine fever (ASF) in Northeast China’s Liaoning Province in August 2018, approximately 1.17 million pigs were culled in a drastic effort to halt further spread. The official data show that China’s pig herd in August 2019 shrank by 38.7% from that in the previous year. Such a large supply gap sent pork prices skyrocketing. According to China’s National Bureau of Statistics (CNBS), in November 2019, pork prices were 110% higher than those in the previous year, driving the country’s CPI to its highest level in eight years. The continual and strong spikes in pork prices have become a growing source of public discontent since pork has been a traditional staple of the Chinese diet for generations. Government officials have even toured the country to speak with people about the scarcity of pork, which could undermine social stability if left unaddressed. However, currently, there is no available cure or vaccine for the highly contagious ASF. Therefore, despite the increasing pork prices, many pig farms are reluctant to restock pigs after their pigs were slaughtered, fearing that the spread of this disease could result in considerable losses.

To restore hog production, China released a three-year action plan that specifies 18 keys tasks, including implementing subsidies and increasing fiscal support to pig farms. For example, China allocated more than $2.44 billion in funds between September 2019 and January 2020 to subsidize pig farms whose pigs were culled due to ASF. Specifically, the rules stipulate that farms must receive a subsidy of 1200 CNY ($170) for each pig culled to stop the spread of this disease, i.e., the compulsory culling subsidy (CCS). This subsidy reaches approximately 75% of the market price per pig and will be dispensed every six months instead of annually to accelerate delivery, significantly boosting farms’ confidence in restoring production. Moreover, the government also offers subsidies to consumers to make the expensive pork more affordable. To be specific, there are two types of consumer subsidies as follows. (i) The price subsidy (PS), the government subsidizes designated pork vendors and places price caps on the pork sold there. For example, in China’s southern city of Nanning, the local government subsidized 10 designated markets, and the residents are allowed to buy up to 1 kg of pork at a price 10% lower than the average price of the previous 10 days. (ii) The revenue subsidy (RS), the government gives a monthly subsidy to each low-income family to help offset the high pork prices. For instance, from April to August 2019, China’s 29 provinces gave about $286 million in cash to low-income families (reaching more than 80 million residents) to ensure that they could continue to afford to purchase pork.

Given that the Chinese government has allocated a considerable budget to the ASF subsidy programs, it is essential to examine to what degree the intended impact can be achieved through these subsidy programs. We examine the following questions in this paper: (i) Under what conditions should the government subsidize farms, consumers, or both? (ii) If the government decides to subsidize consumers, should it offer PS or RS? (iii) What are the impacts of the risk of new ASF outbreaks, farms heterogeneity, the proportion of low-income residents among consumers, and the government’s other ASF interventions on the optimal subsidy programs? (iv) How should the government modify its subsidy programs if the farms’ breeding capacity is constrained, their yields are partially correlated, or the number of farms increases?

To answer the above questions, we use a game-theoretic framework in which two representative farms (in terms of breeding capacity) compete and must operate under yield uncertainty in the market. We characterize the government’s optimal subsidy programs under four different settings: (a) when the two farms have ample breeding capacities and their yields are perfectly correlated (i.e., the base model); (b) when the smaller farm’s breeding capacity is constrained; (c) when the two farms’ yields are partially correlated; and (d) when there are more farms competing in the market. Our analysis generates the following managerial insights:

(1)
The PS and RS are equivalent in terms of improving farms’ expected profits and consumer welfare. To maximize social welfare, the government’s optimal subsidy program evolves from subsidizing farms only (SF) to subsidizing both farms and consumers (SB) and, finally, to subsidizing consumers only (SC) as more emphasis is allocated to consumer welfare.
(2)
Although the CCS is offered, farms will reduce their BSs if a high risk of new ASF outbreaks is expected. In contrast to the prevailing intuition that this high risk leads to a large CCS, our findings indicate that a constant CCS is optimal if the government places similar emphasis on the two stakeholders. Moreover, the optimal PS and RS always increase in this risk.
(3)
The government’s ASF control measures to reduce the yield uncertainty and to increase the surviving rate of the farms’ inputs can enhance the value of subsidy programs in terms of increasing the two stakeholders’ welfare. However, the government’s price control measure via releasing the strategic pork reserve onto the market, will undermine such value.
(4)
When the smaller farm is faced with the breeding capacity shortage problem, the SF (SC) policy is optimal if the government emphasizes more on the farms’ expected profits (consumer welfare). Otherwise, the optimal subsidy program is jointly decided by a breeding capacity threshold and a subsidy budget threshold. Intuitively, the larger farm will breed more in this case. However, we show that it will breed even less if the smaller farm just faces a mild shortage problem while the government emphasizes consumer welfare slightly more. Moreover, we provide the specific steps to derive the optimal subsidy programs in this case.
(5)
When the two farms’ yields are partially correlated, offering CCS will motivate both farms to breed more (less) in the lowly (highly) correlated case; otherwise, offering this subsidy will make the smaller (larger) farm breed more (less). We show that the SC policy dominates the highly correlated case, and the structure of the optimal subsidy programs in the low and moderately correlated cases is characterized. In addition, we numerically show that the farms may suffer from the subsidy programs, especially when the government places a significant emphasis on consumer welfare.
(6)
When there are multiple farms competing in the market, the SF (SC) policy is optimal if the government allocate more emphasis to the farms (consumers); otherwise, the SB (SF) policy is optimal if the subsidy budget is large (small) while the total number of the two types of farms is small (large). Moreover, if the total number of the two types of farms is very large, the government will adopt the SF policy only when it emphasizes a lot on farms’ profits.

The managerial insights derived in this paper offer guidelines to not only policymakers in China but also stakeholders in other countries suffering from this disease. By September 2019, 51 countries had been affected by ASF. Among these countries, Vietnam culled more than 4.7 million pigs. Amid the difficult situations posed by COVID-19, ASF continues to spread, intensifying the current health and socioeconomic crises. By January 2021, a total of 3,214 AFS outbreaks were reported by the World Organization for Animal Health (OIE) as ongoing in Asia. The OIE and the Food and Agriculture Organization (FAO) have called on countries and partners to join forces against ASF.

The remainder of this paper is organized as follows. Section 2 reviews the related literature. Section 3 describes our modelling framework. Section 4 analyzes the optimal subsidy programs of the base model in which the two farms have ample breeding capacities and their yields are perfectly correlated. 5 Extension 1: Constraint on the breeding capacity, 6 Extension 2: Correlated yields, 7 Extension 3: Multiple farms extend the base model to scenarios in which the smaller farm’s breeding capacity is constrained, the two farms’ yields are partially correlated, and there are multiple farms competing in the market, respectively. Section 8 concludes the paper and suggests topics for future study. All technical proofs are relegated to the Appendix.

Section snippets

Literature review

This study contributes to the literature on production planning under yield uncertainty in the agriculture sector, we refer the reader to Boyabatlı, Nguyen, and Wang (2017) for a comprehensive review. Kazaz (2004) studied the production planning problem in the olive oil industry in which producers face random yield and demand and must decide how to lease farm space from farmers to maximize their expected revenues. The author suggested that increased yield variance does not necessarily increase

Modelling preliminaries

Consider two profit-maximizing pig farms that compete in a Cournot fashion in the market and must decide their breeding scales (BSs) at the start of a new breeding season while facing yield uncertainty. Cournot models are widely used in the agricultural operations literature (e.g., Chen and Tang, 2015, Akkaya et al., 2016, Yu et al., 2018) and are particularly suitable for cases in which a lag exists between the time when decisions are made and the time when uncertainty is resolved (Alizamir et

Base model

In this section, we characterize the government’s optimal subsidy programs in the case where the two farms have ample breeding capacities and their yields are perfectly correlated. We proceed in four steps in reverse order. First, we derive the two farms’ equilibrium BSs given any subsidy program, i.e., subsidy program A or program B. Second, we derive the government’s two optimal subsidy programs considering their influences on farms’ BS decisions. Third, we compare the effectiveness of the

Extension 1: Constraint on the breeding capacity

As mentioned above, more than half of China’s pigs are produced on family farms that have very limited breeding capacities. The production capacity has always played an important role in agriculture in the presence of yield uncertainty. Therefore, policymakers should understand how the breeding capacity constraint affects the optimal subsidy programs. In this section, we assume that farm 2 has a limited breeding capacity, denoted by $L$ and $L < λ_{2}$ , while farm 1 has ample capacity to satisfy its

Extension 2: Correlated yields

Throughout this paper, we assume that the two farms’ yields are perfectly correlated. In this section, we examine the government’s optimal subsidy programs in the case where the farms’ yields are partially correlated. Denote $ε_{i} \in [{\overset{Ì \pm}{ε}}_{i}, {\bar{ε}}_{i}]$ the yield uncertainty factor of farm $i$ ( $0 < {\overset{Ì \pm}{ε}}_{i} < {\bar{ε}}_{i} < 1$ , $i = 1, 2$ ). Let $E (ε_{i}) = μ_{i}$ , $Var (ε_{i}) = {σ_{i}}^{2}$ , and $Cov (ε_{1}, ε_{2}) = σ_{1, 2} > 0$ , where $Cov (ε_{1}, ε_{2})$ measures the degree of the correlation between the two farms’ yields. Specially, similar to Alizamir et al. (2019), we consider values of $σ_{1, 2}$

Extension 3: Multiple farms

In the previous analysis, we assume that there are only two farms competing in the pork market. In reality, according to the report by Yicai (a famous Chinese financial media), by 2019, the scattering pig raising households (i.e., small farms, whose breeding scale is smaller than 500) account for up to 99% of the total 26 million pig farms in China, and produce about half of China’s pigs. As the pig industry becomes increasingly modernized, both the portions of the small farms’ quantities and

Conclusions

Motivated by the Chinese government’s ASF subsidy programs, this paper attempts to examine the policy implications of these subsidies to offer guidelines to policymakers. In particular, the government designs and offers subsidy programs with an earmarked budget to farms, i.e., CCS, and consumers, i.e., PS or RS, to maximize social welfare. A game-theoretic framework under yield uncertainty is developed to capture the strategic interactions among farms, consumers, and the government when

Declaration of Competing Interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgment

The author thanks Mohamed I Dessouky, the anonymous associate editor and reviewers for their constructive comments. This work was supported in part by the National Natural Science Foundation of China under grant number 72001028, and the Fundamental Research Funds for the Central Universities under the grant number 2020RC32.

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View full text

Finding the way out to African swine fever: Analysis of Chinese government’s subsidy programs to farms and consumers

Highlights

Abstract

Introduction

Section snippets

Literature review

Modelling preliminaries

Base model

Extension 1: Constraint on the breeding capacity

Extension 2: Correlated yields

Extension 3: Multiple farms

Conclusions

Declaration of Competing Interest

Acknowledgment

Computers & Industrial Engineering

Computers & Industrial Engineering

Economic Modelling

Computers & Industrial Engineering

Government interventions to promote agricultural innovation

Manufacturing & Service Operations Management

An analysis of price vs. revenue protection: Government subsidies in the agriculture industry

Management Science

Cournot competition in networked markets

Management Science

Crop planning in sustainable agriculture: Dynamic farmland allocation in the presence of crop rotation benefits

Management Science

Capacity management in agricultural commodity processing and application in the palm industry

Manufacturing & Service Operations Management

Exclusive channels and revenue sharing in a complementary goods market

Marketing Science