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Agricultural member state modelling for the EU and Eastern European countries

Final Report Summary - AGMEMOD 2020 (Agricultural Member State modelling for the EU and Eastern European countries)

Based on a common country model template, country level models have been developed during the course of the 'Agricultural Member State modelling for the EU and Eastern European countries' (AGMEMOD 2020) project that reflects the specific situation of the agricultural sectors in the individual countries. The AGMEMOD model is an econometric, dynamic, multi-product partial equilibrium model in which a bottom-up approach is used. In this project these country level models have been combined in a composite EU model. The approach adopted within the AGMEMOD 2020 project allowed for the capture of the inherent heterogeneity of agricultural systems existing within the EU, while simultaneously maintaining analytical consistency across the estimated country models. In general, the AGMEMOD model for any given country consists of different supply and demand modules for those commodities that represent the majority of the product coverage of the country concerned.

The AGMEMOD model database itself is composed in part of balance sheets for all commodities with values on beginning stocks, production, imports, human food use, feed use, processing and industrial use, exports and ending stocks. Where possible the partnership uses Eurostat sources such as Agris (Agricultural information system) and NewCronos, as these meet the criteria on consistency and coherency. The EU AGMEMOD model is built within a GTREE framework. GTREE has been developed by the LEI (Dol, 2008) and stands for GAMS tree.

The baseline in this study has been developed as follows:
- milk quotas remain in place at the 2008 / 09 level throughout the projection period;
- 2008 / 09 quota expansion package (the 2 % milk quota increase agreed for 2008 / 09) has been implemented;
- butter and SMP intervention remains in place throughout the projection period;
- no further WTO reform occurs and the URAA conditions hold;
- export subsidies and import tariffs remain 'on the books' and are used when required to support the farm gate milk price.

It seems highly unlikely that quota removal would be accompanied by any additional compensation for the resultant decrease in milk prices, so no compensation will be assumed. Alteration of other policy levers in order to create a coherent set of policies for the dairy CMO as quotas are relaxed is a possibility. Taking the foregoing into consideration the following four scenarios have been developed.

Scenario milk 1:
- The dairy quota is expanded by 1 % each year from 2009 / 10 to 2013 / 14;
- Represents five annual increases relative to the 2008 / 09 quota;
- 2009 / 10 is year 1 (total increase 5 % by 2013);
- Milk quota is eliminated in 2015;
- No compensation is paid to producers for the resulting price drop;
- Other policies remain unchanged.

Scenario milk 2:
- The dairy quota is expanded by 2 % each year 2009 / 10 to 2013 / 14;
- Represents five annual increases relative to the 2008 / 09 quota;
- 2009 / 10 is year 1 (total increase 10 % by 2013);
- Milk quota is eliminated in 2015;
- No compensation is paid to producers for the resulting price drop;
- Other policies remain unchanged.

Scenario milk 3:
- Scenario milk 1 plus the following policy changes:
- Butter intervention prices will be reduced by -2 % per year starting in 2009.

Scenario milk 4:
- Scenario milk 2 plus the following policy changes:
- Butter and skimmed milk powder intervention prices will be reduced by -2 % per year starting in 2009;
- Dairy subsidised export limits are reduced by -5 % per year starting in 2009.

The main results for the baseline and scenarios analysis are summarised below:

Baseline results
- EU dairy commodity and milk prices decline from the elevated levels of 2007 over the period 2008 and 2009 and the medium term trend is for prices to be maintained at a level above those observed in the earlier part of this decade. Since EU production is virtually unchanged and consumption is increasing, the amount of dairy product available for export declines.
- The strong internal demand for cheese means that cheese production increases in the baseline, while production of butter and SMP decreases.
- As milk yields increase by about 1 % per year, there is an offsetting reduction in the number of dairy cows. This means that the contribution of the dairy sector towards EU beef output declines over time.

Scenario results
- Unless otherwise specified, the changes that take place under the scenarios are described in relation to the outcome in 2020 under the baseline.
- External factors relating to global supply and demand for dairy products (as reflected in the baseline) are more important determinants of the future level of EU dairy product prices, milk prices and dairy production than the changes in the milk quota regime which are examined.
- Under the scenarios this change in product mix observed in the baseline is also a feature, but in addition some of the additional milk that is produced is channelled to all the major products.
- The outcome under the milk quota expansion / elimination scenarios leads to conclusions which are broadly the same for the first two policy options. EU dairy production increases by 2010 relative to the baseline by about 4 % and there is a 5 % reduction in the EU milk price as a result. The outcome at the aggregate EU level is the sum of both increases and decreases in individual MS level milk production. Beyond 2010 there is more or less a stabilisation of production in most of the MS. Due to the further policy intervention under scenario milk 3 and scenario milk 4 the outcomes especially concerning prices are more marked.
- EU MS can be categorised in accordance with the extent of the production increased (decreases) that are projected. Grass based dairy producers, with high initial quota rents, are best placed to expand milk production under quota expansion and elimination. High feed prices drive rents to zero relatively quickly in MS with low initial rents and where grain feeding is the dominant production system. Few countries exploit the full extent of the quota increase available to them in the phase out period. These results suggest that the quota expansion allowed under the milk 1 and milk 3 scenarios is sufficient for most MS and that a 'hard landing' at the EU level is avoided. A few MS continue to increase milk production once quotas are removed even under the milk 2 and milk 4 scenario and there is merit in considering larger quota increases for these MS, particularly given that their contribution to overall EU milk production is small. This would avoid large production increases at the point where milk quotas are removed, which could otherwise have negative short run consequences for the sector in these MS.
- The consequences of milk quota removal for other agricultural sector are minimal. There are projected to be more dairy cows (than in the baseline), but this is offset through a reduction in the number of beef cows, so the net change in the total number of cattle is small relative to the baseline. Hence the consequences of the scenarios for the derived demand for feed are trivial.

The harmonised policy (PH) modelling approach was developed in work package 5 (WP5) of the AGMEMOD 2020 project and its objective was to improve the modelling of economic integration processes within the AGMEMOD model. The implementation of the PH approach involved:
- the development of specific harmonised country policy data sets;
- The introduction of policy data in harmonised way within the combined model environment.

The following scenarios were assumed:
- baseline scenario
- alternative scenarios
- CAP health check agreement scenario
- EU budget review scenario.

The CAP health check agreement scenario results confirm that the reform recently agreed is a very limited one. The alternative CAP health check scenario that was analysed examined the impact of a mandatory move to national flat area payment systems and the impact of the implementation of an EU wide flat area payment in conjunction with the full decoupling of all remaining coupled policy instruments. Results suggest that the retention of coupled payments continues to support agricultural production in the EU. The introduction of an EU flat area payment leads to increased production in those member states with lower direct payments per hectare than the EU average and declines in agricultural activity and agricultural commodity production in those member states with above average direct payment receipts per hectare. However, under the EU flat rate scenario there are no dramatic changes in the pattern of EU agricultural production. These results suggest that a bolder and perhaps more horizontally equitable decoupled payment regime could be considered. The two EU budgetary review scenarios analysed examined the commodity market impacts of policy changes that would significantly reduce the budgetary resources devoted to CAP pillar I measures. While these two scenario's impacts are the largest of the alternative CAP policies analysed the impacts on commodity markets and on agricultural output prices are relatively modest.

The achievements of the project in its first year generally corresponded with the project's initial plan of work for 2006. For each country modelled and for each commodity considered a sub-model structural form has been specified, following notes and guideline documents provided by the coordinator of the corresponding WP. The work undertaken during the second year corresponded with the project's initial plan of work for 2007 for most of the WPs, even though some tasks were completed with some delay. The main objectives of the corresponding WP have been achieved. Through the development of the AGMEMOD country models a rich set of commodity supply and utilisation datasets for EU Member States and for Russia, Ukraine, Croatia and FYROM have been developed. A database of EU common agricultural policy instruments has also been developed. During the third year, the AGMEMOD combined model has been used to provide policy analysis on the impact of milk quota abolition as well as several policy analyses related to potential CAP reforms. As well as successfully achieving the development of a policy analysis tool at the level of individual Member States and at the EU level, the AGMEMOD project has contributed to the establishment of a rich set of networks within individual Member States and across the expanded EU.