Trade liberalization in the world soybean complex in the presence of scale economies with multinational processing firms

Fumiko Yamazaki, Purdue University

Abstract

The objective of this study is to evaluate the consequences of trade policy liberalization in world soybeans and products markets. The soybean complex has several characteristics--joint production of soybean meal and oil, soybeans as an intermediate good, existence of multinational processing firms, and economies of scale in soybean processing--which affect the policy impacts. Therefore, to analyze the issue of policy reform in soybeans and soybean products markets we need an empirical model which incorporates not only policy environments but also the characteristics of the soybean complex. For this, a non-spatial price equilibrium model including 25 countries/regions is constructed. The model is sub-categorized based on trading and policy environments. The major traders--the U.S., Argentina, EC, Japan, and Brazil--are modeled as major block countries with structural equations. The remaining countries are modeled as state traders with exogenous trade or through reduced form equations. Multinational firms and economies of scale in the soybean processing industry are introduced through the soybean crushing equation resulting from the profit maximization behavior of the multinational oligopolists with scale economies. Based on a Herfindahl index, the number of symmetric soybean processing firms worldwide is set at ten. Calculated conjectural variations of the processing industry are relatively close to the Bertrand conjectural variations of $-$1. This implies that despite the oligopoly structure the soybean processing sector may be approximated by a competitive solution. Simulation of the consequences of removing all policy distortions in the world soybean complex suggests that during the first year the world (U.S.) prices of soybeans and soybean oil rise while the world price of soybean meal falls. To allow for the dynamic effects of adjustments, the model is simulated over a 5-year time period. The results of the long-run solutions are similar to those of the first year, except the magnitudes of changes in prices are greater under long-run policy reform. Soybean producers in the United States, Brazil, and Argentina all gain gross revenue from global policy liberalization in both the short-run and long-run. Policy liberalization shifts soybean crushing globally in favor of the United States. Simulation model with free entry indicates the soybean processing industry operates with losses; hence, firms should exit from the market in the long-run. The model suggests that if rationalization occurs it will be faster with liberalization due to changes in profitability of crushing for some nations.

Degree

Ph.D.

Advisors

Paarlberg, Purdue University.

Subject Area

Agricultural economics

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