Milk Quota Expiry Impacts and Sensitivity Analyses Using The
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Agrarwirtschaft 58 (2009), Heft 5/6 Milk quota expiry impacts and sensitivity analyses using the CAPSIM model Auswirkungen der Milchquotenabschaffung und Sensitivitätsanalysen mit dem CAPSIM Modell Heinz Peter Witzke* University of Bonn, Germany Axel Tonini* European Commission, Seville, Spain Abstract* Schlüsselwörter Various scenarios for an expiry of European Union milk quotas are 'Gesundheitscheck'; Milchquoten; Quotenrente; Preistransmission; analysed with the Common Agricultural Policy SIMulation (CAPSIM) Exportsubventionen model. This comparative-static, partial equilibrium modelling tool covering the whole of agriculture for all EU member states has been disaggregated to represent nine secondary dairy products. Impacts 1. Introduction are compared to a reference run where the 2003 Common Agricul- The aim of this study is to provide a multi commodity anal- tural Policy Reform is projected into the future. The main milk quota ysis on European Union milk market reform options in the expiry scenario is for 2020. Key results are that milk production would increase by 3.0% in EU-27 whereas milk prices would drop by context of the ongoing Common Agricultural Policy 'Health 7.2%. The resulting decline in butter prices is shown to be larger if Check' (HC). The analysis is carried with the Common EU authorities cannot rely on export subsidies for market manage- Agricultural Policy SIMulation (CAPSIM) model (WITZKE ment. The regional pattern of impacts is strongly determined by the et al., 2008). In a reference run or 'baseline scenario' the specification of quota rents. Furthermore, details of intra EU price 2003 Common Agricultural Policy (CAP) Reform is pro- transmission are shown to influence the differences between Mem- jected into the future (2014 and 2020) giving a yardstick for ber States. An applied welfare analysis of the main expiry scenario quota expiry scenarios. The main scenarios (quota expiry in gives a significant redistribution from EU-27 farmers and much less 2015 and soft landing until 2014) correspond to the Com- from taxpayers to dairies and final consumers. The estimated small mission’s proposal. In addition, for the quota expiry scena- positive overall welfare gain would increase in a situation without export subsidies. rio it is investigated whether the presence or absence of export refunds matter. Sensitivity analyses are carried out Key words for some of the most important methodological aspects in 'Health Check'; milk quotas; quota rent; price transmission; export this analysis, notably: different quota rent assumptions and subsidies flexible intra EU price transmission. Zusammenfassung This paper is structured as follows. In Section 2 we present the structure, assumptions, and database of the model and Verschiedene Szenarien zur Abschaffung der EU-Milchquoten wur- describe the functional forms used for both supply and den mit dem 'Common Agricultural Policy SIMulation' (CAPSIM) demand. In the same section market clearing and price Modell untersucht. Dieses komparativ-statische partielle Gleichge- transmission, and the behaviour of dairies are illustrated. In wichtsmodell wurde im Milchsektor erheblich disaggregiert (neun Verarbeitungsprodukte). Der Referenzlauf beinhaltet eine Beibehal- Section 3 the definitions of reference run, policy scenarios tung der derzeitigen Ausgestaltung der EU-Agrarpolitik bis zum Jahr and sensitivity analyses are given. In Section 4, scenario 2020. Im Hauptszenario eines Auslaufens der Quotenregelung in results are discussed, including the sensitivity analyses. 2015 ergibt sich in der EU-27 eine Produktionsausdehnung von 3.0% Section 5 concludes. und ein durchschnittlicher Verfall der Rohmilchpreise um 7.2%. Der resultierende Preisrückgang bei Butter ist abhängig davon, ob Exporterstattungen zur Abfederung des Preisdrucks eingesetzt 2. Structure of the model werden. Die Ergebnisse werden stark von der Spezifikation der Quotenrenten geprägt, während das Bild auf Mitgliedsländerebene 2.1 Basic structure and assumptions auch von der Intra-EU-Preistransmission beeinflusst wird. Im Key characteristics of CAPSIM can be summarised as fol- Hauptszenario mit Exporterstattungen kommt es zu einer deutlichen lows. It is an agricultural partial equilibrium model relying Umverteilung von der Landwirtschaft und, weitaus weniger gewich- on exogenous inputs of macroeconomic variables. It is tig, von Steuerzahlern zur Molkereiwirtschaft und Endverbrauchern. comparative static, but may be used for any sequence of Der resultierende Wohlfahrtsgewinn ist klein, würde aber ansteigen, projection years provided that exogenous variables have wenn die Quoten in einer Situation ohne Exporterstattungen auslau- been forecasted for these years and parameters are adjusted fen würden. according to the length of the run. In terms of empirical specification, it relies on calibration techniques and a ri- gorous microeconomic framework for behavioural func- * Disclaimer: The views expressed are purely those of the authors tions rather than on a full econometric estimation. Several and may not in any circumstances regarded as stating an offi- technological balances have been incorporated to supple- cial position of the European Commission. ment the microeconomic framework. Examples are balances 228 Agrarwirtschaft 58 (2009), Heft 5/6 of: male and female calves, land, feed energy and protein, as the discounted sum of the future stream of net benefits to milk fat and protein. For each of these it is imposed that milk producers which comes from maintaining the quota. aggregate use and supply exactly match, based on complete The milk shadow price is the producer price that would coverage of the agricultural sector in each EU Member induce a profit-maximising producer to produce the current State (MS). CAPSIM is a deterministic model trying to quota level in the absence of production restrictions. The capture the mean result from a set of exogenous variables, difference between the market price and the shadow price so far starting from a three-year average base year to elimi- defines the so-called unit quota rent. For a survey on empir- nate as far as possible the influence of yield fluctuations ical approaches and results regarding quota rents or mar- and short-run price fluctuations. Market clearing differs ginal costs see TONINI (2008). The milk quota rents for the depending on the products. For most products, including base year are taken, in percentage form, from RÉQUILLART dairy products, it explicitly distinguishes imports and ex- et al. (2008) for the former EU-15 countries whereas for the ports, while for others (mainly ‘non tradable’ items, see New Member States they are set to zero given that milk below) it only gives net trade. Major policy instruments quotas were not yet phased in. include various premiums for activities with associated ceilings, set-aside, intervention prices, quotas, domestic 2.3 Functional forms used for supply and demand subsidies, border measures (tariffs, flexible levies/export The behavioural functions for producers are derived from a refunds). The main simulation outputs of CAPSIM are Normalised Quadratic (NQ) profit function (LAU, 1978) in market balances, agricultural production, income and wel- terms of so called net revenues and net prices. Net revenues fare. CAPSIM may be run in two modes: the reference run of activities are market revenues net of shadow values for mode and the policy simulation mode. The reference run land (crops), feed energy and protein (animals). Net prices mode is used to calibrate the unknown time-dependent of feed items are correspondingly prices corrected for sha- parameters (shifters) in model equations, building on ex- dow values of feed energy and protein, see also WITZKE ogenous forecasts and ex post observations for the related and ZINTL (2007) for details of this approach to include variables (i.e. the activity levels). In policy simulation mode physical balances. The normalised profit function in MS all parameters are given and exogenous inputs, for example (m) and year (t) is thus: yields, final consumption expenditure, and the inflation (1) m,t Nm,t m,0,0,t m, j ,0,t Nm, j ,t rate, are usually taken over from the reference run. j Agricultural producers and the processing industry (oilseeds, N N jkm, j ,k m, j ,t m,k ,t , dairy) are profit maximisers. The food industry and com- pound feed industry apply a fixed margin between producer where and consumer prices. Total land supply is exogenous, but (2) , Nm,t NREVm,t ,NPm,t PPm,REST ,t land may turn fallow if land prices drop strongly. Final consumers maximise utility. Policy is usually exogenous is a column vector of price variables s normalised by the but export refunds and import levies are linked to the dif- general price index PPm,REST,t; ference of administrative and market prices. Export demand NREVm,t is a column vector of net revenues NREVm,j for (import supply) from the Rest of the World is described by activity j; an ad hoc behavioural function dependent on the EU export NPm,t is a column vector of net prices NPm,i of input i; price (import price) relative to an exogenous world price. m, j,0,t is a time dependent parameter of the profit function; 2.2 Database description and milk quota rents m, j,k is a time invariant parameter of the profit function. In total the current product list of CAPSIM includes 21 This gives behavioural functions of netputs Ym,j,t linear in agricultural outputs, 5 inputs (imported energy rich feed, Nm,t. Treating parameters m, j,k as time