Impact of the CAP Reforms on U.S. – EU Cereal Trade Sachin Chintawar, Lynn Kennedy, John V. Westra

Impact of the CAP Reforms on Impact of the CAP Reforms on U.S. – EU Cereal TradeU.S. – EU Cereal Trade

Sachin Chintawar, Lynn Sachin Chintawar, Lynn Kennedy, John V. Westra Kennedy, John V. Westra

IntroductionIntroduction

U.S. cereals exports account for over $13 U.S. cereals exports account for over $13 billion dollars in annual sale.billion dollars in annual sale.Policies in the EU as a major importer of Policies in the EU as a major importer of cereals affect U.S. and world prices. cereals affect U.S. and world prices. Change in the trade flow attributed to the Change in the trade flow attributed to the changes in domestic policies of the EU.changes in domestic policies of the EU.Mac Sharry ReformsMac Sharry ReformsAgenda 2000 ReformsAgenda 2000 Reforms

Common Agricultural PolicyCommon Agricultural Policy

Objectives: Objectives:

Increase Agricultural ProductivityIncrease Agricultural Productivity

Ensure fair standard of livingEnsure fair standard of living

Stabilize marketsStabilize markets

Assure availability of suppliesAssure availability of supplies

Consumers pay reasonable pricesConsumers pay reasonable prices

Design of the CAP

Common Agricultural Policy

Structural Policies Market

European Agricultural Guidance & Guarantee Fund

Typical Design of the CAP for Typical Design of the CAP for CerealsCereals

TARGET PRICETARGET PRICE

THRESHOLD PRICETHRESHOLD PRICE INTERVENTION INTERVENTION PRICE PRICE

IMPORT LEVY EXPORTIMPORT LEVY EXPORT SUBSIDY SUBSIDY

WORLD PRICEWORLD PRICE IMPORTS EXPORTSIMPORTS EXPORTS

Mac Sharry ReformsMac Sharry Reforms

The Why Question?The Why Question?Decreasing world prices for cereals & dairyDecreasing world prices for cereals & dairyGATT ComplianceGATT Compliance

Objectives:Objectives:Reduction of cereal support prices by 35%Reduction of cereal support prices by 35%Area Payments to cereal producersArea Payments to cereal producersCompulsory set-aside qualify for area paymentsCompulsory set-aside qualify for area paymentsTradable bonds for milk quota system.Tradable bonds for milk quota system.

Significance for CerealsSignificance for CerealsPRICE PRIOR TO REFORMSPRICE PRIOR TO REFORMS

IMPORT PRICE UNDER GATTIMPORT PRICE UNDER GATT

AREA AID PAID AT FLAT RATEAREA AID PAID AT FLAT RATE (54.34 ECU/TON)(54.34 ECU/TON)

+55%+55%

TARGET PRICES TARGET PRICES (131.11 ECU/TON)(131.11 ECU/TON)

TARIFF EQUIVALENTTARIFF EQUIVALENT (1995 - 140 ECU/TON (1995 - 140 ECU/TON

INTERVENTION PRICE INTERVENTION PRICE (119.19)(119.19)

2000 – 95 ECU/TON)2000 – 95 ECU/TON) EXPORT REFUNDSEXPORT REFUNDS

IMPORTS EXPORTSIMPORTS EXPORTS

Agenda 2000 ReformsAgenda 2000 Reforms

Granting area paymentsGranting area payments

15% reduction in intervention prices for 15% reduction in intervention prices for cerealscereals

Increase set-aside requirements .Increase set-aside requirements .

- Area Payment Scheme- Area Payment Scheme

- Regionalization Scheme- Regionalization Scheme

- Environmental measures- Environmental measures

Objectives of the StudyObjectives of the Study

Effects of the CAP Reforms on the Effects of the CAP Reforms on the bilateral cereal tradebilateral cereal trade

Welfare Implications to farmers, Welfare Implications to farmers, consumers and Government in each of the consumers and Government in each of the trading entitiestrading entities

Data and MethodologyData and Methodology

Five commodity fifteen country model.Five commodity fifteen country model.

U.S. considered as a trading partner.U.S. considered as a trading partner.

Variables included Variables included (A)(A)

Modifications to the Raw Modifications to the Raw DataData

Prior to 1995 three prices were defined by the Prior to 1995 three prices were defined by the EU for calculating different support prices – EU for calculating different support prices – Target Prices, Threshold Prices, Intervention Target Prices, Threshold Prices, Intervention Prices.Prices.

Calculating Import Levies Calculating Import Levies

Calculating Export RefundsCalculating Export Refunds

Calculating Production Refunds Calculating Production Refunds

Apparent Production and Apparent Apparent Production and Apparent ConsumptionConsumption

Econometric Model Econometric Model SpecificationSpecification

Static, Partial equilibrium modelStatic, Partial equilibrium model

Simultaneous – Incorporating Simultaneous – Incorporating interdependence of Demand and Supply interdependence of Demand and Supply

Iterative, Linear, Three Stage LS equation Iterative, Linear, Three Stage LS equation system is developed.system is developed.

Model incorporates two dummy variables Model incorporates two dummy variables to capture significant effects of the CAP to capture significant effects of the CAP Reforms on cereal trade.Reforms on cereal trade.

Econometric Model Econometric Model SpecificationSpecification

Supply Equation Supply Equation (I)(I)

Demand Side SystemDemand Side System– Inventory Demand Inventory Demand (II)(II)– Import Demand Import Demand (III)(III)– Export Demand Export Demand (IV)(IV)– Domestic Demand Domestic Demand (V)(V)

Estimation ResultsEstimation Results

Results for Wheat (1)Results for Wheat (1)

Results for Rye (2)Results for Rye (2)

Results for Barley (3)Results for Barley (3)

Results for Maize (4)Results for Maize (4)

Results for Oats (5)Results for Oats (5)

Results & DiscussionsResults & Discussions

Welfare effects – Producers in EU lose both Welfare effects – Producers in EU lose both due to removal of production refunds and due to removal of production refunds and decreased domestic pricesdecreased domestic pricesU.S. exports show substantial increase U.S. exports show substantial increase since the ratio of U.S. exports to total since the ratio of U.S. exports to total exports to EU was significant in most cases.exports to EU was significant in most cases.Price elasticities of demand indicate the Price elasticities of demand indicate the degree to which consumers will increase degree to which consumers will increase their purchases in response to decline in their purchases in response to decline in domestic prices in the EU.domestic prices in the EU.

Conclusions and SummaryConclusions and Summary

Reforms have had significant effect on Reforms have had significant effect on cereal trade – Advocates Free Tradecereal trade – Advocates Free Trade

More open markets – higher export More open markets – higher export potential for the U.S.potential for the U.S.

Decreased welfare of domestic farmers in Decreased welfare of domestic farmers in EU – Can they be compensated?EU – Can they be compensated?

Forms impetus for analyzing effects of Forms impetus for analyzing effects of new policies new policies

Cereal Imports by U.S. compared to ROCereal Imports by U.S. compared to ROWW

0

5000000

10000000

15000000

20000000

25000000

30000000

35000000

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

Met

ric

To

ns

USA EXTRA EC

Variable NameVariable Name DefinitionDefinition UnitsUnits

lndmprlndmpr Log of Domestic PriceLog of Domestic Price U.S. Dollars per TonU.S. Dollars per Ton

(lnprod+lnimpq(lnprod+lnimpq)/lnconp)/lnconp

Log of Ratio of Apparent production to Log of Ratio of Apparent production to Apparent consumption Apparent consumption 1000 Tons1000 Tons

lnconplnconp Log of ConsumptionLog of Consumption 1000 Tons1000 Tons

mrefmrefDummy Variable capturing the effect of Dummy Variable capturing the effect of Mac Sharry ReformsMac Sharry Reforms

arefarefDummy Variable capturing the effect of Dummy Variable capturing the effect of Agenda 2000 ReformsAgenda 2000 Reforms

lnopstklnopstk Log of Opening StocksLog of Opening Stocks 1000 Tons1000 Tons

lngdplngdp Log of Gross Domestic ProductLog of Gross Domestic Product Million U.S. DollarsMillion U.S. Dollars

lnworldplnworldp Log of World PriceLog of World Price U.S. Dollars per TonU.S. Dollars per Ton

lnexprlnexpr Log of Export RefundLog of Export Refund U.S. Dollars per TonU.S. Dollars per Ton

lnexrtlnexrt Log of Exchange RatesLog of Exchange RatesDomestic Currency per Domestic Currency per U.S. DollarU.S. Dollar

lnimpllnimpl Log of Import LeviesLog of Import Levies U.S. Dollars per TonU.S. Dollars per Ton

lnimpqu/lnimpqlnimpqu/lnimpqLog of Ratio of Imports from United States Log of Ratio of Imports from United States to Total Importsto Total Imports 1000 Tons1000 Tons

lnprodrlnprodr Log of Production RefundsLog of Production Refunds U.S. Dollars per TonU.S. Dollars per Ton

lnexpqlnexpq Log of Export QuantityLog of Export Quantity 1000 Tons1000 Tons

lnimpqlnimpq Log of Import QuantityLog of Import Quantity 1000 Tons1000 Tons

lnprodlnprod Log of Domestic ProductionLog of Domestic Production 1000 Tons1000 Tons

BACKBACK

Calculating Import Levies

12

1

12

1

where ( = 1 - 12) Import Levy for commodity in year 12

12

ijij ij ijIL ThP WP Z

ILQK il i j

K

Z K

1

(where = number of exporting countries)

where is exporting countries (where )

Where:

= Import Levy

= Threshold Price

= World Pric

ij ij

lijij lijn

kijk

WP G N N

kExQG P l k

ExQ

IL

ThP

WP

e

= Yearly Average monthly weighted import levy

= Average monthly weighted import levy

= Import quantity

Z

K

ILQ

Calculating World Prices

BACK

Calculating Export Refunds

BACK

Where:

= Export Refund for commodity in year

= Intervention Price for commodity in year

= World Price for commodity in year

ij ij ij

ij

ij

ij

ER IP WP

ER i j

IP i j

WP i j

Calculating Production Refunds

BACK

:

= Average c.i.f price used for calculation of import levy

= Production Refund for commodity and year

= Intervention Price for commodity and year

ij ij

ij

ij

PR K IP

Where

K

PR i j

IP i j

Where:

= Production Refund for commodity and year

= is a constant set by the European Commission

= Set Aside payment for commodity in year

= Co-responsibilit

ij ij ij

ij

ij

ij

PR K SP CRL

PR i j

K

SP i j

CRL

y levy for commodity in year i j

Where:

= Consumption

= Domestic Production

= Import Quantity Defined for comodity year and countr

= Opening Stocks

= Export Quantity

ijk ijkijkCONP DPROD IMPQ OPSTK EXPQ

CONP

DPROD

IMPQ i j

OSTK

EXPQ

y k

Where:

= Production

= Yield are defined for commodity , year and country

= Area

ijk ijk ijkPROD YIELD AREA

PROD

YIELD i j k

AREA

Apparent Production & Consumption

BACK

1 2 3

4 5

ln ln ln ln

ijt ijt ijt ijt

ijt ijt

prod dmpr prodr gdp

mref aref e

Supply Equation

BACK

:

domestic price

Production

Production Refund

Gross Domestic Product

Dummy for Agenda 2000 Reforms

Dummy for Mac Sharry Reforms

Commodity

Country

Period

Where

dmpr

prod

prodr

gdp

aref

mref

i

j

t

Inventory Demand

BACK

1

2 1

ln ln

ln ln ln ln

:

Opening Stocks

Domestic Price

Production

Import Quantity

Consumption

ijt ijt ijt

ijt ijt ijtij t

opstk dmpr

prod prod impq conp e

Where

opstk

dmpr

prod

impq

conp

Defined for comodity year and country i j k

1 2 3 4

5 6 7

ln ln ln ln

ln ln ( / )

:

Import Quantity

Domestic Price

World Price

Import Levy

Exchange Rate

impq dmpr worldp impl exrt

mref aref impqu impq e

Where

impq

dmpr

worldp

impl

exrt

mref

Dummy Variable for MacSharry Reforms

Dummy Variable for Agenda 2000 Reforms

Import Quantity from U.S.

aref

impqu

Import Demand

BACK

1 2 3

4 5 6

ln exp ln ln ln exp

ln ln ln

:

exp Export Quantity

Domestic Price

World Price

exp Export Refund

Exchange Rate

Dummy Var

q dmpr worldp r

exrt mref aref e

Where

q

dmpr

worldp

r

exrt

mref

iable for MacSharry Reforms

Dummy Variable for Agenda 2000 Reformsaref

Export Demand

BACK

1 2 3

4 5

ln ln ln ln

:

domestic price

Consumption

Opening Stock

Gross Domestic Product

Dummy for Agenda 2

ijt ijt ijt ijt

ijt ijt

dmpr conp opstk gdp

mref aref e

Where

dmpr

conp

opstk

gdp

aref

000 Reforms

Dummy for Mac Sharry Reformsmref

Domestic Demand

BACK

ESTIMATES FOR WHEAT

VariableNo. of Countries

Comments

Inventory Demand

Domestic Price 8

Ratio of Production to Consumption

9

Domestic Demand

Consumption 12

Opening Stocks

6

MREF 10

AREF 11

GDP 12

Export Demand

Domestic Price 4

World Price 2

Export Refunds

8

Exchange Rates

8

MREF 8

AREF 5

Variable Countires

Import Demand

Domestic Price 4

World Price 6

Import Levies 3

Exchange Rates

5

MREF 4

AREF 5

Ratio of U.S. to total Imports 10

GDP 9

Supply

Domestic Price 11

Production Refunds

10

GDP 9

MREF 8

AREF 8

ESTIMATES FOR RYE


Comments

Inventory Demand

Domestic Price

8


10

Domestic Demand

Consumption 7

Opening Stocks

2

MREF 4

AREF 9

GDP 7

Export Demand

Domestic Price

5

World Price 6

Export Refunds

4

Exchange Rates

3

MREF 5

AREF 1

Variable Countries

Import Demand

Domestic Price

12

World Price 0

Import Levies 4

Exchange Rates

3

MREF 4

AREF 3

Ratio of U.S. to total Imports

GDP 6

Supply

Domestic Price

10

Production Refunds

5

GDP 6

MREF 6

AREF 9

ESTIMATES FOR CORN


Comments

Inventory Demand

Domestic Price 9


11

Domestic Demand

Consumption 3

Opening Stocks

7

MREF 12

AREF 12

GDP 9

Export Demand

Domestic Price 4

World Price 5

Export Refunds

7

Exchange Rates

8

MREF 3

AREF 6

Variable Countries

Import Demand

Domestic Price

9

World Price 1

Import Levies 4

Exchange Rates

6

MREF 4

AREF 5


GDP 7

Supply

Domestic Price

11

Production Refunds

6

GDP 5

MREF 3

AREF 5

ESTIMATES FOR BARLEY


Comments

Inventory Demand

Domestic Price 7


13

Domestic Demand

Consumption 7

Opening Stocks

4

MREF 11

AREF 12

GDP 11

Export Demand

Domestic Price 3

World Price 0

Export Refunds

5

Exchange Rates

5

MREF 2

AREF 4

Variable Countires

Import Demand

Domestic Price

6

World Price 1

Import Levies 4

Exchange Rates

1

MREF 5

AREF 3


GDP 7

Supply

Domestic Price

11

Production Refunds

8

GDP 6

MREF 7

AREF 11

ESTIMATES FOR OATS


Comments

Inventory Demand

Domestic Price 5


12

Domestic Demand

Consumption 7

Opening Stocks

4

MREF 7

AREF 10

GDP 9

Export Demand

Domestic Price 5

World Price 2

Export Refunds

2

Exchange Rates

3

MREF 6

AREF 5

Variable Countries

Import Demand

Domestic Price

3

World Price 0

Import Levies 2

Exchange Rates

6

MREF 6

AREF 5


GDP 4

Supply

Domestic Price

5

Production Refunds

5

GDP 3

MREF 5

AREF 4

Documents

Impact of the CAP Reforms on U.S. – EU Cereal Trade Sachin Chintawar, Lynn Kennedy, John V. Westra