1. Introduction. Christine Wieck, Ignacio Perez, Wolfgang Britz

Transcription

1 Medium Term Prospects for EU Dairy Markets under Agenda 2000 and the Midterm Review Proposals A Quantitative Analysis for the Spanish Dairy Sector with the CAPRI Modelling System Christine Wieck, Ignacio Perez, Wolfgang Britz Institute for Agricultural Policy, Market Research and Economic Sociology, Bonn University Prepared for AEEA Seminar, March 13-14, Lugo (Spain) 1. Introduction European Dairy Policy has been subject to reform ever since. Even with challenges as the milk quota reform still ahead, the Agenda 2000 policy package introduced already new policy instruments as to offset substantial cuts in market price support. The motives behind the Common Agricultural Policy (CAP) reform were to foster a more competitive farming industry by lowering intervention prices and bringing production more closely into line with demand. In the Midterm Review (MTR) of the Agenda 2000, the EU Commission proposed further CAP changes, which will affect the competitiveness of dairy farms and industry. Whereas the Agenda 2000 broke with the traditional line in dairy policy through the introduction of compensation payments for dairy cows, the MTR proposal affects dairy policy mainly in an indirect way. The main thrust of the MTR proposals is about decoupling support from production decisions by means of the introduction of a singled decoupled income payment per farm. Hence, all compensation payments 1 regardless if they are attached to area or number of animals, shall be converted in an income payment allowing for complete farming flexibility and increasing market orientation of each farm. Results from the analysis of both policy proposals will be presented in the following. With 14% of total value of agricultural production in 2000, milk production is the most important activity both in the EU as a whole and for a majority of the Member States. The share of milk in agricultural output varies however widely between Member States and regions reaching 30-50% in some Spanish regions such as Galicia or Cantabria. Traditionally, there exists a strong link between the dairy and beef sector due to dual-purpose breeds and dairy market reform will hence affect beef markets as well. Worldwide, the EU is both the biggest producer and consumer of milk, with a share of 21% in production. These facts underline that reforms in the dairy sector impacts on farm income, domestic consumption and the competitive positions of the EU in agricultural world markets. The following quantitative analysis based on the CAPRI modelling system compares developments of production, demand and agricultural income projected for 2009 under the policy set of the MTR proposal to the results of the reference run shown above, which represents the full implementation of the Agenda 2000 proposal in the year The analysis for the dairy sector is based on the so called Option 1 of the Commissions proposal regarding possible future avenues for the development of the dairy sector (European Commission 2000). Hence, a continuation of Agenda 2000 for the dairy sector is assumed. The paper is organised as follows: after this brief introduction, the second section presents the CAPRI modelling system with which the analysis is conducted. The third part describes policy implementation and scenario assumptions for both, reference and simulation run. Chapter four presents the results for dairy and beef markets as well as regional developments in Spain and some conclusions are drawn in section five. 1 No rule without exceptions: Some payments are not included (durum wheat quality premium, protein crop supplement, payments for rice and some payments for processors of specific products).

2 2. The CAPRI modelling system The CAPRI modelling system is designed as a projection and simulation tool for the agricultural sector based on: (1) A physical consistency framework, covering balances for agricultural area, young animals and feed requirements for animals as well as nutrient requirement for crops, realised as constraints in the regional supply models. The market model ensures that fat and protein comprised in the milk delivered to dairies is equal to the fat and protein comprised in the processed dairy products. (2) Economic accounting principles according to the definition of the Economic Accounts for Agriculture (EAA). The model covers all outputs and inputs included in the national EAAs for the Member States, with revenues and costs broken down consistently to regions and production activities. (3) A detailed policy description. The regional supply models capture all relevant payment schemes with their respective ceilings as well as set-aside obligations and sales quotas. The market side covers tariffs, intervention purchases and subsidised exports. The policy of non-eu regions is based on OECD PSE/CSE data bank. (4) Behavioural functions and allocation steering are strictly in line with micro-economic theory. Functional forms are chosen to be globally well behaved, allowing for a consistent welfare analysis. The model distinguishes a supply and a market module, iteratively coupled. The supply module consists of aggregate programming models at NUTS II level, working with exogenous prices during each iteration. After being solved, the regional results of these NUTS II models crop areas, herd sizes, input/output coefficients etc. are aggregated into Member State level models, which are then calibrated to these results by using techniques borrowed from Positive Mathematical Programming. Young animal prices are then determined by linking these Member State models into a non-spatial EU model with market balances for young animals. Afterwards, supply and feed demand functions of the market module are calibrated to prices and results from the supply module on feed use and production of the current iteration. The market model is then solved and the resulting producer prices at Member State level drive the next iteration with the supply models. Equally, in between iterations, premiums for activities are adjusted if ceilings are overshot according to the results laid down in the Common Market Organisations. The underlying methodology of supply for yearly crops and animals assumes a two-stage decision process. In the first stage, producers determine optimal variable input coefficients (nutrient needs for crops and animals, seed, plant protection, energy, pharmaceutical inputs, etc.) per hectare or head for given yields which are determined exogenous by trend analysis. Nutrient requirements enter as constraints in the supply models, whereas all other variable inputs together with their prices define the so-called accounting costs. The proceeding reflects the calculation of gross margins in farm management. In the second stage, the profit maximising crop mix and animal numbers are determined simultaneously with cost minimising feed and fertiliser mix in the supply models. Availability of grass and arable land as well as sales quotas restrict production possibilities and the crop mix is further on influenced by set-aside obligations. Animal requirements (energy, protein etc.) are covered by a cost minimised feed mix combination, whereas fertiliser needs of crops are met by either organic nutrients found in manure or purchased fertiliser. Fodder (grass, straw, fodder maize, root crops, silage, milk from suckler cows or mother goat and sheep) is assumed to be non-tradable, and hence animal processes are linked to the crop production and regional land availability. All other outputs and inputs can be sold and purchased at fixed prices. Selling of milk cannot exceed the quota and for sugar production an A,B,C quota system is embedded. 2

3 Graph 1. Link of modules in the CAPRI modelling system Premium calculator Calculate premiums depending on CMOs (ceilings, base areas..) Levels Supply Feed demand Supply 200 Regional optimisation models Perennial sub-module Aggregation to Member States Prices Output Markets Multi-commodity spatial market model with 11 regional aggregates and all EU MS Young Animal Markets Linked optimisation models at Member State level The use of a mathematical programming approach has the advantage to directly embed compensation payments, set-aside obligations, voluntary set-aside and sales quotas, as well as to capture important relations between agricultural production activities. The programming models are calibrated to observed set-aside hectares, including voluntary set-aside, and non food production on set-aside land is treated as a separate production activity. Fallow land not falling into set-aside programs reflects the difference between land reported as idling in national statistics and data from commission services on actual hectares in set-aside programs. Not at least, environmental indicators as N,P,K balances and output of gases linked to global warming are implemented in the system. Output coefficients for the high final weight activities (dairy cows, male and female adult fattening) are created by increasing average milk and meat yield by 20 %, for the low intensive variants by decreasing them by 20 %. All intermediate inputs with the exception of feed and young animal are corrected accordingly. The requirement functions are directly applied to the changed final weights. Input coefficients for young animals are identical across the variants. In the case of feeding stuff, a set of requirement functions defines the need of each animal category depending on, for example, live weight, weight increase per day, milk yield. These requirement function are mostly derived under experimental conditions and define a technological frontier from which actual technology on farm level can be expected to deviate, not at least due to for example control and management costs usually not taken into account in experiments. These requirements must be covered by feeding an appropriate mix of feeding stuff to each animal herd. As sectoral availability of feeding stuff is known ex-post, a complex non-linear optimisation program distributes the available feeding stuff resources to the animals, simultaneously ensuring that the distribution leads to plausible feeding costs. If necessary, the requirement functions are shifted to account for differences between actual feeding practises of the farms and the technological frontier defined by the requirement functions. In order to describe the relationships in between cattle production activities and to define the effective number of animals bred (flow) at regional level, a so-called herd module has been developed. At national level, data on slaughtering, imports and exports of live animals and meat (CRONOS, COMEXT, INTRASTAT) as well as herd size statistics (stocks) (CRONOS, REGIO) allow quite well to describe 3

4 livestock activity levels (e.g. numbers of milk cows, suckler cows, calves raised, calves fatted, heifers raised, heifers and beef fatted) and their inter-relationships (see Graph 2 above) 2. Graph 2. Modelling of young animal flow in the cattle sector Beef Milk Cows Suckler Cows Young cow Breeding Heifers Fattening female Calves Female Calf Raising female Calves Young heifer Fattening Heifers High/Low Male Calf Raising male Calves Young bull Veal Fattening male Calves Male adult cattle High/Low Beef The market module breaks down the world into 12 country aggregates 3, each aggregate featuring systems of supply, human consumption, feed and processing functions. The parameters of these functions are derived from elasticities borrowed from other studies and modelling systems, and calibrated to projected quantities and prices in the simulation year, where the choice of the functional form (normalised quadratic for feed and supply, Generalised Leontief Expenditure function for human consumption) and further restrictions (homogeneity of degree zero in prices, symmetry, correct curvature) ensure regularity. Accordingly, the demand system allows for the calculation of welfare changes for the consumers. Policy instruments in the market module include (bi-)lateral tariffs and Producer/Consumer Subsidy Equivalent price wedges (PSE/CSE). Some important Tariff Rate Quotas (TRQs) as well as explicit modelling of intervention sales and subsidised exports under WTO commitment restrictions are implemented for the EU. Special attention is given to the processing stage of dairy products for the EU Member states. First of all, balancing equations for fat and protein ensure that processed products use up exactly the amount of fat and protein comprised in the raw milk. Production of processed dairy products is based on a normalised quadratic function driven by the difference between the dairy product s market price and the value of its fat and protein content. Lastly, prices of raw milk are equal to its fat and protein content valued with fat and protein prices. 4 The Armington assumption drives the composition of demand from domestic sales and the different import origins depending on price relations and thus determines bilateral trade streams. The model comprises a two stage Armington system: on the top level, the composition of total demand from imports and domestic sales is determined, whereas the lower stage determines the import shares from different origins. Due to the Armington assumption, product markets for different regions are linked by import 2 A detailed description can be found in : Britz, W., Setti, M. Wieck, C. (2002): Improvements of the Dairy and Beef sub-module., CAPRI working paper 02-06, available on the project web site. 3 EU, East European Candidate Countries, Mediterranean countries, U.S., Canada, Australia & New Zealand, Free trade developing countries, High tariff traders (as Japan), India, China, ACP countries, Rest of the World 4 A detailed description can be found in : Britz, W., Wieck, C. (2002): Modelling the processing of dairy products, CAPRI working paper 02-08, available on the project web site 4

5 streams and import prices when they were observed in the base year. Accordingly, no uniform world market price is found in the system. 3. Scenario assumptions 3.1. Scenario assumptions reference run: Agenda 2000 The policy for the status quo scenario of the reference run reflects the Agenda 2000 policy extended to the year It is taken as the comparison point for the Mid term Review impact analysis. Therefore, it is necessary to reflect carefully the status quo policy representation and scenario assumptions and exogenous shifters for this run. The most crucial policy parameters for the reference run can be listed as follows: (1) Administered prices for cereals, beef and milk products fall decrease according to the Berlin decisions regarding the Agenda 2000 by 15%, 20% and 15% respectively. (2) Due to its activity based layout, the CAPRI supply model is well suited to deal with the compensation payment scheme. A detailed modelling component allows for the definition of payment schemes linked to outputs (current or historic yields) or activity levels in combination with ceilings in physical and/or valued terms. The following payments are included in the reference run: COP premiums for cereals, oilseeds, pulses and energy crops; traditional and established durum wheat premiums; direct income support for dairy cows; direct payments to sheep and goat; national envelopes for dairy cows, sheep & goat and bovine meat cattle; slaughter premiums for adult cattle and calves; and national premiums to dairy cows in northern Sweden and Finland. Many of these premium schemes are restricted by ceilings in value and maximum amount of eligible hectares or heads defined at national or regional level. Premiums are therefore cut in the model if these ceilings are exceeded. (3) The modelling system considers set-aside obligations as a constraint in the regional programming models. Official mandatory set-aside rates ex-post and in the reference run (10 %) are corrected downwards to reflect the small producer scheme, based on information of Commission Services. The small producer shares are trend forecasted for the simulation year. In some cases, data at regional level regarding small producer shares were available for early years of the McSharry reform and the resulting regional differentiation was kept unchanged over time. (4) Milk quotas are supposed to increase with Member States specific rates, for the EU as a whole by 2.4 %. Percentages of under- and over-utilisation of quotas at regional level are kept constant as observed in the base year. Sugar quotas are kept at base year levels, but the system of A and B levies as well as production of C sugar is embedded in the analysis. Exogenous development of yields are based on trend analysis at EU Member State level, covering the years For cereals, they are harmonised with the latest DG Agri s Market Outlook. 5 Variable inputs are first shifted proportionally with the yields and then reduced by input saving technical progress of -0.2 % p.a.. Exceptions are nutrient needs of crops (N,P,K) and animal requirements (energy, protein, fibre etc.) which are driven by yield dependent engineering functions. The demand system for the EU is calibrated to observed member state data on per capita consumption, income and population levels 6. Changes in demand behaviour not linked to these factors have to be based 5 It should be noted that the DG-AGRI market outlook expect a cut in cereal yield growth rate between of 50 % against the period. This assumption, taken over in the current analysis, has considerable impacts on the development of cereals markets, as the difference between long term trends and the ones applied adds up to some 20 Mio t by the end of In most cases in line with the data found in DG-Agri s publication Prospects for Agricultural Markets

6 on assumptions and trend analysis and the baselines of the EU commission and FAPRI. Inflation is set to 1.9 % p.a. and nominal GDP growth for the EU to 2.7 % p.a. and is used as a proxy for consumers available income. The assumptions for the EU as a whole are taken over to the individual Member States. Population growth at Member States level are taken from EUROSTAT. The price framework in the market part of the model is based on representative long-term time series for world market prices of major raw and processed agricultural products, which are trend forecasted. These trends had been compared and partially revised to medium term forecasts by OECD, FAPRI and the EU Commission. Developments of domestic prices are based on these world market price developments, border protection and domestic market policies. Behavioural functions for intervention stocks and subsidised exports in the market model are calibrated to observed quantities and price relations between domestic, export and administrative prices for a three year average around Data relating to other world regions stem ex post from the WATSIM modelling system, shifted to the year 2009 based on results of other studies. The resulting data set is adjusted to fulfil consistency conditions, both in the base and the simulation year. Main data source for the shifters in supply and demand for non-eu regions is framework of FAO s global perspective unit Scenario assumptions: MTR run The MTR proposal aims at (1) economic viability, (2) social balance, (3) environmental integration and animal health and welfare concerns as well as (4) rural development. In order to achieve the goals, the main thrust of the proposal lies in the decoupling of income support from production decisions. In the following, the model specification of the MTR proposal will be presented. (1) In order to calculate the so-called uniform premium, premiums paid under Agenda 2000 were modified according to the MTR proposal: An increase by 3 /t of historic yield to 66 /ton for Grandes Cultures reflect a 50 % compensation of the cut in cereals intervention prices. A reduction of the supplementary payment in durum wheat to 250 /ha in traditional areas bundled with an abolishment of the supplement in established areas. Introduction of an income payment of 102 /t in rice (177 /t 75 /t remaining as a crop specific premium) 7. (2) These partially redefined premiums for arable crops, cattle and sheep falling under the new uniform per farm premium and labelled decoupled were applied to the three year average 1998 areas or herd sizes, and cut if respective ceilings were overshot. (3) The premiums were dynamically modulated until 2009, i.e. six steps of -3 % cuts from the original level to a final maximal cut of -18 %. As only payments above a certain ceiling per farm plus per Annual Working Unit (AWU) exceeding two AWUs are subject to the modulation, smaller reduction were applied for groups of payments according to information provided by Commission Services based on the European Farm Accounting Data Network. (4) Afterwards, the resulting premium sum at regional level is distributed over eligible hectares and converted into a regional specific uniform premium per ha in the MTR run. The resulting regional premium sum was introduced as a ceiling in values at regional level, so that regional premiums per eligible hectare would be cut if a premium overshot takes place. The following top-ups are added to the uniform premiums: durum wheat (15 /t), rice (75 /t), protein (9.5 /t) and energy crops (45 /ha). According to the proposal, vegetable and fruits are not eligible, and it was assumed that the 7 Support to nuts is not included in the runs, as well as direct payments for dehydrated or sun dried fodder. 6

7 same is valid for table olives and olives for oils, nurseries, flowers, vineyards and the so-called other crops. (5) Cereals intervention prices were reduced by 7.5% - the combined effect of a drop by 5% to 95,35 /t and the abolishment monthly reports. Further on, rye intervention was abolished and rice intervention prices reduced to 150 /ton. Set-aside obligations are defined as a continuation of the individual historic set-aside obligation. That obligation was calculated at NUTS II level based on the regional crop mix in the base year and on an obligatory set-aside rate of 10 %, corrected by national or regional small producer shares. The costs of compulsory farm audits on all relevant material flows and on-farm processes for all farm receiving more than 5000 are not included in the study. The error is deemed not important, especially as financial support covering operation costs is eligible under Rural Development, and the dynamic modulation will increase budgets available under the second pillar. It can be expected that regional government will at least partially redirect the budgetary funds into new agri-environmental programs, especially the proposed temporary and degressive aid (max 200 /ha) to farms to help them implementing statuary standards. 4. Results This section discusses the simulation results, both in the reference run as well as in the MTR run for a number of key items on the EU, as well as at national and regional level. The first part presents medium term prospects on EU dairy and beef markets and economic impacts of the proposals followed by a detailed assessment of regional impacts Medium term prospects on dairy and beef markets Dairy markets Total raw milk output follows the quota expansion determined by Agenda 2000 of 2.4% to about 125 Mio. t of fresh milk. 8 The main factors affecting dairy markets are thus autonomous trends in milk yields 21.4% in the period 1998 to and demand developments for milk products. On the supply side for processed milk products, different trends can be observed. Whereas cheese production expands strongly, mainly driven by an increasing demand for cheese by around 13% in the reference run (or 18.3 kg cheese per capita consumption), supply for butter remains stable and skimmed milk powder production declines heavily. On the demand side a consumption shift towards fresh and processed milk products with a lower fat content can be observed. Additionally, the demand shift to products with lower fat content increase the net exports of butter substantially, as new markets must be found outside of EU. Net trade of skimmed milk powder decreases drastically, and the EU becomes a net importer. Net trade of cheese remains stable whereas a strongly increasing share of imports of fresh milk products can be observed. 8 Note that the figure raw milk presented in table 1 includes the whole milk produced on farm and not only the share of milk delivered to dairies. Therefore, the simulated increase of 2.5%, higher than the global quota expansion by Agenda 2000, is due to an increase on farm consumption of milk. 7

8 Table 1. Market balance sheet for dairy products on EU level (1000t) Product Balances: European Union Cheese Supply Raw milk Base year [1998] Agenda reference run [2009] MTR unchanged dairy policy [2009 Intervention Net trade Demand Supply Butter Skimmed milk powder Fresh milk products Cream Concentrated milk Whole milk powder Net trade Demand Supply Intervention Intervention Net trade Demand % -0.95% 2.56% -0.05% % -0.05% % % % -2.20% -0.09% -1.10% -5.36% -0.01% % % % 0.53% 0.48% % -9.88% 1.83% % -1.42% 13.04% -0.25% -3.96% -0.12% % % 2.09% -0.11% % -0.06% % % % -2.61% -0.13% -1.14% % 0.00% % 7.91% 2.33% 0.02% 0.31% -0.05% % % 2.28% 0.09% 0.29% -0.07% Furthermore, the decrease of administrative prices by 15% under Agenda 2000 leads to a strong reduction of intervention purchases for all products as reported in table 1. 9 Additionally, subsidised exports for milk products are reduced both in quantity and in value by 71% and -92%, respectively. The overall reduction of subsidised exports by around t mainly originate from skimmed milk powder. Under both scenarios, cheese remains the product where most of exports are done with subsidies. The MTR proposal will not affect substantially the net trade and FEOGA budget for dairy products. 10 As shown in table 2 consumer and producer prices follow reductions in administered prices but remain distinctly above intervention level. Consumer prices are expected to slightly increase in the MTR simulations. The comparison of the MTR run with the reference scenario does not reveal significant changes in market balance positions and price developments as dairy policy is widely unaffected by the proposal. 9 Note, that in the model butter and cream are aggregated in the market module. Therefore, the intervention position is reported for both products. 10 As for the reference run, deviation in income growth, inflation and / US$ exchange rate could change results relating to domestic and world market prices and market interventions as well as subsidised exports. 8

9 Table 2. Price development for dairy products on EU level ( /t) Prices : European Union Consumer price Butter 5768 Skimmed milk powder 3210 Cheese 8055 Fresh milk products 1027 Cream Concentrated milk 3212 Whole milk powder 4134 Base year [1998] Agenda reference run [2009] Producer price Administrative price 1850 MTR unchanged dairy policy [2009] Consumer Producer Administrative Consumer Producer Administrative price price price price price price % % % 0.01% -0.02% 0.00% % % % 0.79% % 0.00% % % -7.86% 0.25% -0.04% 0.00% % % 0.14% -0.01% % % 0.01% 0.00% % 0.18% % 0.16% Note: Producer prices are calculated on product definition as they are used in the market model, e.g. price for butter represents the price for the aggregate butter and cream (same holds for Fresh milk products which contains in the market model the product categories: fresh milk products, concentrated milk and whole milk powder). Administrative price for cheese is a weighted mean of administrative prices for butter and skimmed milk powder multiplied with reported fat and protein content of cheese production. Table 3 presents the market developments for dairy products in Spain. The picture is quite similar to the average European one, even though consumption pattern differ slightly. Demand increases for both cheese and fresh milk products is less pronounced with per capita consumption of cheese 9.2 kg only reaching 50% of the EU average. Together with quota expansions above the European average of +2.4%, net trade of Spanish dairy products increases. 11 Table 3. Market balance sheet for dairy products for Spain (1000t) ESPAÑA Supply Base year [1998] Intervention Net trade Demand Raw milk Butter Skimmed milk powder Cheese Fresh milk products Cream Concentrate d milk Whole milk powder Agenda reference run [2009] MTR unchanged dairy policy [2009] Intervention Inter- Supply Net trade Demand Supply vention Net trade Demand % % 10.69% 0.00% % 0.00% % % % -3.34% -0.85% -1.84% -5.66% -0.01% % % 62.59% % 1.26% % 35.44% -1.19% % % 11.84% -0.72% -1.76% -0.14% % % 0.95% -0.58% -9.68% -0.11% % % % -3.61% -0.85% -1.84% -6.97% -0.01% % % 0.95% -0.58% -2.41% -0.11% % 17.75% -0.36% -0.58% -0.57% -0.62% 11 Positive net trade position => Production > domestic demand. 9

10 Beef markets Due to the close production linkages of dairy and beef activities, simulation impacts for beef and veal will be briefly presented as well. Table 4. Market balance sheet for beef products on EU level (1000t) Product Balances: Base year [1998] Agenda reference run [2009] MTR unchanged dairy policy [2009] European Union Supply Net trade Demand Supply Net trade Demand Supply Net trade Demand Meat Beef Veal 788 Pork meat Sheep and goat meat 1138 Poultry meat % % -1.38% % 6.19% -0.02% % % -2.72% -6.65% % -0.81% % % -2.19% -3.70% % -0.87% % -5.91% 8.12% 0.13% 0.65% 0.10% % -6.89% 0.33% -5.99% % 0.68% % % 11.39% 0.16% -2.04% 0.28% Mainly by using the assumption of EU s Medium Term Prospects regarding the development of per capita consumption for different meat products, total meat demand is forecasted to grow by 6.2 % from 1998 to Demand for beef drops by -2.7 % reflecting a decrease in per capita consumption of 1 kg, based on own trend analysis and in line with the latest FAPRI base line, but countervailing EU Prospects which forecast stable consumption per capita. Meat supply from cattle decreases by -3.4 %, leaving the EU with net exports of 0.4 Mio t. The cattle and sheep & goat meat processes were assumed to profit from input saving technical progress of -1 % per annum. Human consumption per capita of meat increases from about 87 kg in 1998 to 90 kg to 2009, with 45 kg of pork, 23 kg of poultry, 17 kg of beef, 2 kg of veal and 4 kg of sheep and goat meat. The sharpest increase is forecasted for poultry meat with 11.4 %, which combined with a production growing by around 8.2 % reduces somewhat EU s position as a net exporter. Growth in pork meat is less pronounced both in human consumption and supply, but leaves the EU with net exports of about 1.26 Mio t, not much different from the base year. For the EU, supply of beef (-6.6 %), veal (-3.7 %) and sheep and goat meet (-6 %) are expected to drop under the MTR proposal, whereas pork and poultry meat remain stable. A slight drop in meat consumption (-0.02 %) results from increased consumer prices (0.8 %). Whereas pork and poultry meat consumer prices are stable, reduced supply from the cattle chain raises farm gate prices for beef by 5.6 % and consumer prices by 2 %. The price shift is accompanied by a consumption shift from beef and veal (-0.8 %) to pig (0.1 %) and poultry (0.3 %). 10

11 Table 5. Market balance sheet for beef products in Spain (1000t) Product Balances: Base year [1998] Agenda reference run [2009] MTR unchanged dairy policy [2009] ESPAÑA Supply Net trade Demand Supply Net trade Demand Supply Net trade Demand Meat % % -1.00% % 5.88% 0.13% Beef % 1.81% -4.75% -6.68% % -0.74% Veal % % -4.78% 3.17% % -0.74% Pork meat % 5.16% 7.15% 0.17% 1.00% 0.10% Sheep and goat meat 245 Poultry meat % % -0.27% -6.95% % 0.03% % % 10.16% 0.27% -4.57% 0.61% The market balance sheet for meat in Spain presents similar trends as the one for the European Union. Overall supply of meat in the reference run increases slightly less (5%) than the European average. The expansion is mostly due to increases in pork and beef production. Beef meat supply is expected to decrease a little bit stronger than for the EU, accompanied by more pronounced drops in demand for beef and veal. In opposite to dairy products, the MTR proposal will affect the meat supply, whereas demand remains far more stable due to high marketing margins between producer and consumer prices. Especially beef production processes are affected by the MTR proposal, mainly by the shift in premium allocation from a per head basis to a decoupled area payment. Reduced herd sizes, especially for suckler cows, decrease meat supply and provokes increases in producer price for beef by +5.4% Impact on agricultural income, budget and welfare As discussed above, almost all prices for agricultural outputs are forecasted to fall in real terms in the reference run for the EU. As seen in table 6, output value from agricultural production at EU level is forecasted to drop by 7.3 %, whereas input value decreases by 1.3 %, mostly due to falling prices for feeding stuff. Overall, gross value added at basic prices (agricultural income) reaches Billion, a decrease in real terms of around 12.2 %. Given long term trends in the agricultural labour force, income per AWU in agriculture could still increase in real terms. Consumers gain from decreasing consumer prices in the reference run a long term trend as cost reductions in agriculture reduce food prices. Total premium payments decrease by -8.5 % in the MTR run. Agricultural income nevertheless stays stable, as input drops by some 3.2 % in value whereas output value falls by 1.3 % only as prices increase. Consumer losses due to slight increasing prices are offset by stronger savings in the FEOGA budget. Overall, welfare is almost not affected. A more detailed view on the FEOGA budget positions shows a shift in the compensation payments from cereals and oilseeds to fodder crops on arable land. The MTR proposal foresees the transfer of budget savings of the modulation from the first to the second pillar As far as farmers benefit from increased rural development programs, that could offset income losses from the modulation. 11

12 Table 6. Welfare analysis for EU and Spain (Mio ) Equivalent variation Feoga budget Base year Reference run MTR Base year Reference run MTR EU EU EU ESPAÑA ESPAÑA ESPAÑA % % % -8.92% % -7.46% EAA Output % -1.30% % -1.26% EAA Input % -3.24% % -2.83% Premiums % -8.46% % -6.92% Agricultural income 12= % -0.14% % -0.81% Total 13= % % For Spain the welfare analysis shows a decrease in agricultural income of 14.5% in the reference run under Agenda policy. This is slightly more than the EU average. In opposite to the EU average, modifications in the premium scheme lead to a reduction in overall premium payments for Spain originating from the animal sector. Increasing payments to the beef and cattle in the Spanish meat sector (+150% compared to only 130% at EU average), mostly due to the newly introduced dairy cow payment cannot offset the reduced premiums to the sheep & goat sector. This explains, why the FEOGA budget reduction in the Agenda reference run is so pronounced in Spain. Crop production has to face cuts in area premium payments which cannot be compensated by the newly introduced cattle and dairy cow premiums, due to lower production density in the national average. Decreasing consumer prices cannot offset the welfare effect of decreased agricultural income. Overall welfare change in the MTR proposal is small hiding a redistribution within the agricultural sector and a shift of budget positions from the first to the second pillar. As consumers loose slightly more than the EU average, in opposite to the EU result a small welfare loss can be observed. The following map shows the changes in premium payments per hectare at NUTS 2 level for the EU from reference run to MTR proposal. Compared to the foreseen 18 % drop in premiums due to modulation, the overall cut is smaller as (a) part of the premiums e.g. national envelopes are not included in the modulation and (b) farm specific ceilings prevent a full cut for included ones. Therefore, especially regions with high cattle density will be at the lower end of premium reductions. 12

13 Map 1 Comparison of changes in total premium payments per hectare, MTR against Agenda 2000 Note: From dark green to light green: between 21 % and -10 %, white around -9 % and from light red to dark red between 2 % and 26 % income per hectare. Percentage changes with respect to Agenda 2000 reference run Developments in regional production structure in Spain In this section, developments in the production structure of Spain will be presented. As the CAPRI model is designed to work on NUTS II level, data and simulation results can be consistently provided on a detailed regional level. A selection of the available data with special focus on dairy and suckler cow activities will be reported in this section Herd size and regional income for cattle activities The base period of the model is a three-year-average around The following graph shows regional herd sizes for dairy and suckler cow herds. The milk production is focused in northern regions. Galicia is by far themost important region with twice the number of dairy cows than the next important region Castilla-Leon. High suckler cow herds are found in Castilla-Leon but also in the center and south of Spain, namely Extremadura and Andalucia. 13

14 1000 heads Graph 3. Regional production of dairy and suckler cows in Spain Base year (1998) activity levels Dairy cows Suckler cows GALICIA CASTILLA-LEON ASTURIAS CANTABRIA CATALUNA ANDALUCIA PAIS VASCO CASTILLA-LA M. NAVARRA BALEARES ARAGON MADRID CANARIAS C. VALENCIANA EXTREMADURA RIOJA MURCIA Table 7 shows the development of herd sizes and income for main cattle activities in Spain. The model predicts a slow down of milk yield increases against the trend higher reduction of the more efficient cows ( 12.4 %) compared to about 8.3 % for low yield milk cows can be seen. The shift is provoked by reduced milk prices combined with rising pressure over the young animal markets. The total dairy cow herd is simulated to decrease by 10.5 % to an inventory of 1.12 Mio dairy cows in As the model allows for Europe wide young animal trade, the overall European decrease in dairy cow herd sizes provokes a short supply of young animals for raising processes and therefore input costs for dairy production increase. The trend of growing suckler cow herds observed in the last year continues up to a herd size of 1.8 Mio heads (7.6 %) in Table 7. Supply details for main cattle activities in Spain Activity Information: Base year [1998] Agenda reference run [2009] MTR unchanged dairy policy [2009] ESPAÑA Premium per head Income per head Herd Size Supply Premium per head Income per head Herd Size Yield Supply Income per head Herd Size Supply Suckler -5.23% % % 567 cows % 7.63% % % Dairy Cows % 24.88% % 2076 low yield % 14.50% % -1.05% Dairy Cows % 24.88% % 4684 high yield % 9.07% -7.77% 0.47% Male adult cattle low % % % 119 weight % -4.31% % -7.96% Male adult cattle heigh % % % 184 weight % -4.99% % -4.18% Heifers fattening % % 67 low weight % -3.69% % -4.95% Heifers fattening % % 102 high weight % -6.13% % -1.89% 14

15 Income per head for low yield dairy cows and high yield dairy cows is expected to increase by +16.5% and +4.1% respectively (see graph 4). Intensive dairy cow production profits less of increased fodder availability and stable calves prices, but is more affected by dropping milk prices which are not completely compensated by premiums. The higher production intensity is reflected in higher total variable input costs of 1309 /head/year, nearly double than the amount for low yield dairy cows (730 /head/year). Income in the cattle fattening processes drops due to several factors. First of all, prices for beef are forecasted at 2909 /ton, equivalent to a drop in real terms of 26.3 %. Secondly, feed price reductions are less pronounced and prices for all other variable inputs are forecasted to increase. Premiums increase for male fattening cattle from 98 to 207 per head and for heifers for fattening from 0 to 75 per head but cannot offset the mentioned price developments. As total fodder production remains stable and alternative uses of the factors employed in grass land based farms are restricted, total cattle herds drop by only 2.8 %. The MTR results reveal (see graph 4), that the assignment of premiums to land, previously attached to animals, leads formally to a drastic drop in income per activity unit, both for milk cows and cattle fattening processes. However, part of this shift will be offset by direct income payments to grass land used for cattle production. Inside of the cattle chain, activities which draw a higher part of their income from direct payments are affected most. Accordingly, suckler cows drop by some 26.2 %. Milk production is intensified by a shift to higher milk output per cow. These developments interact with reduced herd sizes in the fattening chain, as well as with an increase of average slaughter weights. The latter is due to the fact that animals with low final weights draw a higher percentage of income from direct payments. Graph 4. Percentage changes in activity levels and income distribution for low and high yield dairy cows MTR run against Agenda 2000 reference run Low yield dairy cows Activity levels High yield dairy cows From dark to light green: -2% to -1.% From light to dark red: -0.9% to -0.2% Income distribution From dark to light green: 0% to + 0.5% From light to dark red: +0.6% to +0.8% % From dark to light green: -14.5% to -12% From light to dark red: -11% to -8 % From dark to light green: -8.8% to -7.6% From light to dark red: -7.5% to -5% 15

16 Trends on young animal markets The mathematical programming approach on the supply side of the model allows to assess the impacts of policy or price changes in the cattle chain. When looking at young animal markets, it is important to note, that the model allows to trade young animals within the EU. As shown in table 8, reduced cow herds in Spain allow to reduce the number of female and male raised calves (-4.9% and 1.7% respectively) and heifers (-8%) in the reference run. Reduced meat prices combined with less calves born affect the calves fattening processes as well, which drop by around -15%. The reduction in both the beef fattening processes and suckler cows with premiums allocated to grass land under the MTR proposal reduces the demand for calves in the EU, and therefore the number of raised calves and heifers drops further. Table 8. Supply details for young animal activities in Spain Activity Information: Base year [1998] Agenda reference run [2009] MTR unchanged dairy policy [2009] ESPAÑA Premium per head Income per head Herd Size Supply Premium per head Income per head Herd Size Yield Supply Income per head Herd Size Supply Heifers % % 329 breeding % -8.15% % -7.32% Fattening % % 9 male calves % % 40.24% 5.51% Fattening female % % 9 calves % % -0.69% 0.82% Raising % % 1102 male calves % -1.77% % -9.30% Raising female % % 1041 Calves % -4.93% -9.62% -5.70% 5. Conclusions Medium term drivers in European dairy markets are the developments of consumption patterns and CAP instruments. With the quota system unharmed by both the Agenda 2000 package and the MTR proposal, and quota quantities almost unchanged, price developments for dairy products reflect the interaction between consumption trends towards low-fat dairy products and cheese, and market interventions depending on administrative price levels. In the reference run, reflecting the Agenda 2000 package, cuts in administrative prices for butter and skimmed milk powder let market prices decrease, and producer income drops despite the introduction of compensation payments. The MTR proposal from July 2002 certainly leads to a higher market orientation of European farmers. Due to less coupled premiums, allocation efficiency increases with farming decisions closer linked to market prices. Additionally, the proposal reduces scope and frequency of market interventions as intervention prices are further reduced below expected average world market prices. However, a stronger European currency or temporary imbalances in world markets could still provoke a built up of intervention stocks. The continuation of the CAP reform path of shifting from price to direct income support further detaches budget outlays from market developments and stabilises the FEOGA budget as direct support is bounded to value ceilings. In the recently published draft of legal texts for the MTR proposals (Commission of the European Communities 2003) the European Commission suggests the prolongation of the system of dairy reference quantities until the year 2014/15 combined with a 1% quota increase in the years 2007/8. An additional asymmetric price cut for skimmed milk powder (-3.5%) and butter (-7%) beyond Agenda 2000 is 16

17 foreseen, stepwise over five years. Based on the simulation results for the MTR package as defined last summer, the additional stipulations are not likely to change the picture dramatically. The quota increase will depress somewhat prices, and hence trigger additional demand. Higher market interventions are unlikely, as administrative prices are further reduced, so that the FEOGA budget should not be affected. Producers will gain from increased milk quantities, and loose somewhat from lower prices. If cleverly managed, the higher quotas could help some farmers to profit from scale effects and speed up structural adjustments. Increased dairy cow herds will depress calves prices, and are likely to reduce the suckler cow herd. Even if the model does not feature back- and forward linkages with other sectors of the economy, it should be noted that both agricultural output in quantities and values as well as input use are reduced under the MTR proposal affecting rural economic activities linked to agriculture, but counteracted by higher budgets for rural development under the second pillar resulting from modulation. 6. References Commission of the European Communities (2002): Mid-Term Review of the Common Agricultural Policy, Communication from the Commission to the Council and the European Parliament, , COM(2002) 394, Brussels. Commission of the European Communities (2002a): Report on Milk Quotas, Commission working document, SEC(2002) 789 final. Commission of the European Communities (2003): Proposal for a Council Regulation establishing common rules for direct support schemes under the common agricultural policy and support schemes for producers of certain crops, COM(2003) 23 final. European Commission Directorate for Agriculture (2000): The CAP reform: Milk and Milk products, Brussels European Commission Directorate for Agriculture (2002): Prospects for Agricultural Markets , Luxembourg: Office for Official Publications of the European Communities. European Commission Directorate for Agriculture (2000): Agenda 2000 CAP Reform decisions - Impact Analyses, Luxembourg: Office for Official Publications of the European Communities. FAPRI (2002): World Agricultural Outlook. Iowa State University University of Missouri-Columbia INRA-WAGENINGEN (2002): Study on the impact of future options for the Milk Quota system and the common market organisation for milk and milk products, INRA Consortium University of Wageningen. 17