How Scary are Food Scares?

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. A study by UGA agricultural and applied economists 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. 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.