Modeling demand for fishmeal using a heterogeneous estimator for panel data

Increased livestock and aquaculture production can put pressure on the fishmeal market, and thus industrial fisheries stocks, since both of these sectors use fishmeal in their feeds. Data indicate that fishmeal supply has reached a production limit due to limited marine resources. Meanwhile there has been an explosive growth in global aquaculture production in the last couple of decades while traditional livestock production continues to grow at a steady rate. This paper examines the impact this may have on the global fishmeal market and industrial fisheries using a derived demand analysis of fishmeal. Inelastic demand for fishmeal implies that prices are bound to increase strongly, which, furthermore, can limit growth of global aquaculture. We estimate a panel data model of fishmeal demand using a shrinkage estimator that allows heterogeneous estimators for individual countries. This is important for assessing the impact these two sectors will have on the fishmeal market. Our results show that the precision of predictions is substantially higher for a shrinkage estimator than for the OLS estimator and standard panel data estimators. Furthermore, econometric models estimated by OLS produce implausible elasticities for some countries. According to the empirical results from the shrinkage model total fishmeal demand is generally inelastic in own price. However, the own price elasticity has increased in absolute terms as salmon aquaculture production has increased relative to pig and poultry production. This implies that there is scope for reduced fishmeal consumption in the salmon industry when prices increase