Estimating the Environmental Impacts of Pillar I Reform and the Potential Implications for Axis II funding RPA Prepared for: Defra Natural England Agriculture and Natural Resource Economics Northminster House Area 4e, Millbank Peterborough c/o 17 Smith Square PE1 1UA London SW1P 3JR Prepared by: ADAS UK Ltd SAC Commercial Ltd Woodthorne Kings Buildings Wergs Road West Mains Road Wolverhampton Edinburgh WV6 8TQ EH9 3JG Date: March 2008 0936648 © ADAS Estimating the Environmental Impacts of Pillar I Reform Acknowledgements The authors would like to thank all those who helped them prepare this report. In particular we are indebted to Defra and Natural England for their steer and support. We would also like to recognise the input from: (i) Peer reviewers Stuart Ashworth (Quality Meat Scotland) and Andrew Moxey, who commented on the economic modelling: (ii) Industry stakeholders from a range of organisations (see Appendix 10) who attended case study workshops and contributed to the assessment of environmental impacts. An informal meeting was held separately with NFU to discuss the project outputs. The Team The team was led by ADAS UK Ltd, which managed the overall project delivery and provided agricultural and environmental experts. SAC were joint-contractors and led the economic modelling work. Risk & Policy Analysts (RPA) have contributed to the analysis of environmental impacts (flood risk) and implications for agri-environment schemes. IGER undertook the analysis of losses to air (greenhouse gases and ammonia). i Estimating the Environmental Impacts of Pillar I Reform Executive Summary ADAS and SAC were commissioned by Defra and Natural England to estimate the environmental impacts of Pillar I reform and the potential implications for Axis II funding in England. The context for this work is the Government paper ‘A Vision for the Common Agricultural Policy’, which considers what a sustainable model of European agriculture might look like. The work informs discussions on the next round of reform of the Common Agricultural Policy (CAP), the ‘Health Check’, scheduled for 2008. There are three distinct tasks: 1. Economic Modelling: estimate the likely effects of Pillar I reform on agricultural production, including land use intensity and farm practices; 2. Environmental Impacts: estimate the likely impact of these changes in agriculture on environmental objectives, including landscape, biodiversity, water quality, greenhouse gas (nitrous oxide and methane) and ammonia emissions, flooding etc.; 3. Agri-environment Measures: advise on the potential budgetary requirements for delivering a specified level of environmental quality through agri-environment measures under Pillar II. The brief for the work sets out three CAP reform scenarios with projections measured against the baseline from the Business as Usual (BAU) III project (SFF0601). This gives four scenarios in total: A) Business as usual (baseline) B) Removal of decoupled support C) Removal of tariff barriers and other trade restrictions D) A combination of B and C. Task 1: Economic Modelling In order to understand the potential environmental impacts of Pillar 1 reform it is first necessary to derive the impacts on agricultural production and land use. The purpose of task 1 is to estimate national and regional changes in agricultural production under the various reform scenarios through the use of economic modelling. Methodology The approach used was based on economic modelling of eight farm types across three farm size categories, using the Farm Business Survey (FBS) typologies and dataset. Supply and demand functions for commodity production were used to predict changes in agricultural land use (i.e. the model can predict how much land is used in agriculture and how it is utilised but not what happens with that land that falls out of agriculture) and production response (crop areas and livestock numbers), using a number of assumptions about international prices and the efficiency of production. The data was mapped at 10x10 km grid squares across England so that spatial variations in the impacts could be visualised. This approach was established in the BAU III project and uses numbers of holdings by farm-type from the Defra 2004 census and average crop areas and numbers of livestock for each farm-type and size by Government Office Region (GOR) from the 2005/06 Farm Business Survey for England. The full methodology for economic modelling and spatial mapping is detailed in the report. ii Estimating the Environmental Impacts of Pillar I Reform Results The results are summarised in Table 1 by reform scenario: Table 1: Forecast changes in crop areas/stock numbers by policy option scenario in 2015 Scenario A Scenario B Scenario C Scenario D Enterprise Per cent from 2004 Per cent change from Scenario A Wheat +13.0 -9.8 -4.5 -26.2 Barley + 0.0 -21.5 -8.2 -63.1 Oilseed rape +19.0 -3.7 38.1 28.5 Potatoes - 5.0 -7.0 -25.4 -21.0 Dairy cows and heifers in milk -12 -3.1 -22.5 -19.7 Beef cows -8 -19.6 -0.3 -25.4 Other cattle -8 -8.8 -11.0 -14.7 Ewes -2 -15.1 -16.2 -20.1 Other sheep -2.5 -28.5 -1.8 -35.6 Pigs -1 -5.7 -18.3 -18.3 Poultry +6 -3.8 -3.8 -3.8 Scenario B In general, the model predicts that the removal of Single Payment Scheme (SPS) will lead to a decline in agricultural activity in England as the ability to cross-subsidise unprofitable production using SPS payments is removed. However, the extent of the change varies between commodities as not all the commodities are cross-subsidised. For example, in the crop sector, the area of wheat and oilseed rape is projected to fall modestly (by 9.8% and 3.7% respectively with respect to the Scenario A) whilst a much larger fall is projected for barley. The fact that the area of potatoes is forecast to decline by 7% under Scenario B highlights a wider effect of cross-subsidy from SPS than just on the crops that have been directly supported historically. As might be expected, given their low relative profitability, the models forecast that the removal of the SPS hits the beef and sheep sectors hardest. This reflects the high level of cross-subsidisation that was implicit from the 2005/6 FBS data upon which the model is built. Whilst the model is able to capture production variations within these sectors, it is less able to accurately capture the production systems and therefore the splits between beef/other cattle and sheep/other sheep need to be treated with some caution. For dairy, removal of the SPS alone is not projected to have a marked effect (-3.1% with respect to Scenario A). This is to be expected given that the dairy sector has been less reliant on the SPS. Scenario C A different pattern of change emerges under Scenario C, though again a general decline in agricultural activity is forecast. However, it is not clear whether the decline will imply a surge in imports as it will be depend on the self-sufficiency levels for each commodity. For crops, the projected fall in the area of wheat is less than under Scenario B (-4.5% with respect to Scenario A) as there is still the ability to cross-subsidise with SPS. However, for oilseed rape an increase of 38.1 per cent is forecast (albeit from a relatively low base area). This relates to the crop enjoying relatively favourable prices under a liberalised scenario due to the fact iii Estimating the Environmental Impacts of Pillar I Reform that liberalisation appears to stimulate demand. A decline in potato area (-25.4% with respect to Scenario A) due to trade liberalisation might reflect increased imports of processed products in a free market situation. Sugar beet production (not shown in summary table) equally seems to suffer through the liberalisation process, probably reflecting the historically high levels of protection for this crop (-29.3% with respect to Scenario A). The models were developed to allow for possible variations in supply response by farms of different size given that they may have a range of cost structures. Although there does seem to be a slight trend for larger farms to maintain slightly higher production levels under liberalisation, it is not marked. As might be expected given the high levels of protection currently offered to the sector internationally, trade liberalisation has a more marked impact on the dairy sector than removal of the SPS. However, for the beef sector, the ability to cross-subsidise using the SPS under Scenario C, seems to outweigh the reduction in prices as a result of trade liberalisation and only a small change in numbers is forecast. Ewe numbers decline by a similar extent as under Scenario B but again the ability to cross subsidise means that overall sheep numbers do not decline significantly. Scenario D The model predicts the largest changes for English agriculture where there is a combination of trade liberalisation and removal of SPS. This is the case even with the assumption that restructuring leads to a 20 per cent reduction in costs for crops and a 10 per cent reduction in costs for livestock systems, through less efficient producers being replaced by more efficient producers. For wheat, the fall in prices coupled with the removal of the option to cross- subsidise leads to a marked reduction in production (-26% with respect to Scenario A). This pattern is more pronounced in the case of barley (-63% with respect to Scenario A). The area under oilseed rape shows growth, albeit to a lesser extent than in scenario C (28.5% with respect to Scenario A) because prices are forecast to rise under trade liberalisation and in the case of Scenario D, this rise outweighs the impact of removal of SPS.