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

Impact of the CAP Reforms on
U.S. – EU Cereal Trade
Sachin Chintawar, Lynn
Kennedy, John V. Westra
Introduction
U.S. cereals exports account for over $13
billion dollars in annual sale.
Policies in the EU as a major importer of
cereals affect U.S. and world prices.
Change in the trade flow attributed to the
changes in domestic policies of the EU.
Mac Sharry Reforms
Agenda 2000 Reforms
Common Agricultural Policy
Objectives:
Increase Agricultural Productivity
Ensure fair standard of living
Stabilize markets
Assure availability of supplies
Consumers pay reasonable prices
Design of the CAP
Common Agricultural Policy
Structural
Policies
Market
European Agricultural Guidance & Guarantee
Fund
Typical Design of the CAP for
Cereals
TARGET PRICE
THRESHOLD PRICE
INTERVENTION
PRICE
IMPORT LEVY
WORLD PRICE
IMPORTS
EXPORT
SUBSIDY
EXPORTS
Mac Sharry Reforms
The Why Question?
Decreasing world prices for cereals & dairy
GATT Compliance
Objectives:
Reduction of cereal support prices by 35%
Area Payments to cereal producers
Compulsory set-aside qualify for area payments
Tradable bonds for milk quota system.
Significance for Cereals
PRICE PRIOR TO REFORMS
IMPORT PRICE UNDER GATT
AREA AID PAID AT FLAT RATE
(54.34 ECU/TON)
+55%
TARGET PRICES (131.11
ECU/TON)
TARIFF EQUIVALENT
(1995 - 140 ECU/TON
INTERVENTION PRICE (119.19)
2000 – 95 ECU/TON)
EXPORT REFUNDS
IMPORTS
EXPORTS
Agenda 2000 Reforms
Granting area payments
15% reduction in intervention prices for
cereals
Increase set-aside requirements .
- Area Payment Scheme
- Regionalization Scheme
- Environmental measures
Objectives of the Study
Effects of the CAP Reforms on the
bilateral cereal trade
Welfare Implications to farmers,
consumers and Government in each of the
trading entities
Data and Methodology
Five commodity fifteen country model.
U.S. considered as a trading partner.
Variables included (A)
Modifications to the Raw
Data
Prior to 1995 three prices were defined
by the EU for calculating different
support prices – Target Prices,
Threshold Prices, Intervention Prices.
Calculating Import Levies
Calculating Export Refunds
Calculating Production Refunds
Apparent Production and Apparent
Consumption
Econometric Model
Specification
Static, Partial equilibrium model
Simultaneous – Incorporating
interdependence of Demand and Supply
Iterative, Linear, Three Stage LS equation
system is developed.
Model incorporates two dummy variables
to capture significant effects of the CAP
Reforms on cereal trade.
Econometric Model
Specification
Supply Equation
(I)
Demand Side System
– Inventory Demand
– Import Demand
– Export Demand
– Domestic Demand
(II)
(III)
(IV)
(V)
Estimation Results
Results for Wheat
Results for Rye
Results for Barley
Results for Maize
Results for Oats
(1)
(2)
(3)
(4)
(5)
Results & Discussions
Welfare effects – Producers in EU lose
both due to removal of production refunds
and decreased domestic prices
U.S. exports show substantial increase
since the ratio of U.S. exports to total
exports to EU was significant in most
cases.
Price elasticities of demand indicate the
degree to which consumers will increase
their purchases in response to decline in
domestic prices in the EU.
Conclusions and Summary
Reforms have had significant effect on
cereal trade – Advocates Free Trade
More open markets – higher export
potential for the U.S.
Decreased welfare of domestic farmers in
EU – Can they be compensated?
Forms impetus for analyzing effects of
new policies
Cereal Imports by U.S. compared to
ROW
35000000
25000000
20000000
15000000
10000000
5000000
USA
EXTRA EC
19
98
20
00
20
02
20
04
0
19
76
19
78
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
Metric Tons
30000000
Variable Name
Definition
Units
lndmpr
Log of Domestic Price
U.S. Dollars per Ton
(lnprod+lnimpq
)/lnconp
Log of Ratio of Apparent production to
Apparent consumption
1000 Tons
lnconp
Log of Consumption
1000 Tons
mref
Dummy Variable capturing the effect of Mac
Sharry Reforms
aref
Dummy Variable capturing the effect of
Agenda 2000 Reforms
lnopstk
Log of Opening Stocks
1000 Tons
lngdp
Log of Gross Domestic Product
Million U.S. Dollars
lnworldp
Log of World Price
U.S. Dollars per Ton
lnexpr
Log of Export Refund
U.S. Dollars per Ton
lnexrt
Log of Exchange Rates
Domestic Currency per
U.S. Dollar
lnimpl
Log of Import Levies
U.S. Dollars per Ton
lnimpqu/lnimpq
Log of Ratio of Imports from United States
to Total Imports
1000 Tons
lnprodr
Log of Production Refunds
U.S. Dollars per Ton
lnexpq
Log of Export Quantity
1000 Tons
lnimpq
Log of Import Quantity
1000 Tons
lnprod
Log of Domestic Production
1000 Tons
BACK
Calculating Import Levies


ILij  ThPij  WPij   Z ij





 ILQ



K   12
 il  where ( = 1 - 12)  Import Levy for commodity i in year j
 K 12




  1



 12


Z    K 12 

  1

Calculating World Prices
WPij  Gij N (where N = number of exporting countries) 




 ExQlij

 where k is exporting countries
G ij   n
 Plij  (where l  k )

 ExQ


kij
 

k 1


Where:
IL = Import Levy
ThP = Threshold Price
WP = World Price
Z = Yearly Average monthly weighted import levy
K = Average monthly weighted import levy
ILQ = Import quantity
BACK
Calculating Export Refunds
ERij   IPij  WPij 
Where:
ERij = Export Refund for commodity i in year j
IPij = Intervention Price for commodity i in year j
WPij = World Price for commodity i in year j
BACK
Calculating Production
Refunds
PRij  K  IPij
Where :
K = Average c.i.f price used for calculation of import levy
PRij = Production Refund for commodity i and year j
IPij = Intervention Price for commodity i and year j
PRij  K   SPij  CRLij 
Where:
PRij = Production Refund for commodity i and year j
K = is a constant set by the European Commission
SPij = Set Aside payment for commodity i in year j
CRLij = Co-responsibility levy for commodity i in year j
BACK
Apparent Production &
Consumption
PRODijk  YIELDijk  AREAijk
Where:
PROD = Production 

YIELD = Yield
 are defined for commodity i, year j and country k

AREA = Area

CONPijk   DPROD  IMPQ  OPSTK ijk  EXPQijk
Where:
CONP = Consumption

DPROD = Domestic Production 

IMPQ = Import Quantity
 Defined for comodity i year j and country k

OSTK = Opening Stocks
BACK

EXPQ = Export Quantity

Supply Equation
ln prodijt    1 ln dmprijt   2 ln prodrijt  3 ln gdpijt 
 4 mrefijt  5 arefijt  e
Where :
dmpr  domestic price
prod  Production
prodr  Production Refund
gdp  Gross Domestic Product
aref  Dummy for Agenda 2000 Reforms
mref  Dummy for Mac Sharry Reforms
i  Commodity
j  Country
BACK
t  Period
Inventory Demand
ln opstkijt   ijt  1 ln dmprijt 

 2  ln prodijt  ln prodij t 1  ln impqijt

ln conpijt   e

Where :
opstk  Opening Stocks 
dmpr  Domestic Price 

prod  Production
 Defined for comodity i year j and country k
impq  Import Quantity 

conp  Consumption 
BACK
Import Demand
ln impq    1 ln dmpr   2 ln worldp   3impl   4 ln exrt 
5 ln mref   6 ln aref   7 (impqu / impq)  e
Where :
impq  Import Quantity
dmpr  Domestic Price
worldp  World Price
impl  Import Levy
exrt  Exchange Rate
mref  Dummy Variable for MacSharry Reforms
aref  Dummy Variable for Agenda 2000 Reforms
impqu  Import Quantity from U.S.
BACK
Export Demand
ln exp q    1 ln dmpr   2 ln worldp   3 ln exp r 
 4 ln exrt  5 ln mref   6 ln aref  e
Where :
exp q  Export Quantity
dmpr  Domestic Price
worldp  World Price
exp r  Export Refund
exrt  Exchange Rate
mref  Dummy Variable for MacSharry Reforms
aref  Dummy Variable for Agenda 2000 Reforms
Domestic Demand
ln dmprijt    1 ln conpijt   2 ln opstkijt   3 ln gdpijt 
 4 mrefijt  5 arefijt  e
Where :
dmpr  domestic price
conp  Consumption
opstk  Opening Stock
gdp  Gross Domestic Product
aref  Dummy for Agenda 2000 Reforms
mref  Dummy for Mac Sharry Reforms
BACK
ESTIMATES FOR WHEAT
No. of
Countries
Variable
Domestic Price
Inventory
Demand
Domestic
Demand
Export
Demand
Comments
8
Variable
Countires
Domestic Price
4
World Price
6
Ratio of
Production to
Consumption
9
Import Levies
3
Consumption
12
Exchange
Rates
5
MREF
4
AREF
5
10
Import
Demand
Opening
Stocks
6
MREF
10
AREF
11
GDP
12
Ratio of U.S.
to total
Imports
Domestic Price
4
GDP
9
World Price
2
Domestic Price
11
Export
Refunds
8
Production
Refunds
10
Exchange
Rates
GDP
9
8
MREF
8
MREF
8
AREF
8
AREF
5
Supply
ESTIMATES FOR RYE
No. of
Countries
Variable
Inventory
Demand
Domestic
Demand
Export Demand
Comments
Variable
Countries
Domestic
Price
12
World Price
0
Domestic
Price
8
Ratio of
Production to
Consumption
10
Import Levies
4
3
Consumption
7
Exchange
Rates
Opening
Stocks
MREF
4
2
AREF
3
MREF
4
AREF
9
GDP
7
Domestic
Price
5
World Price
6
Export
Refunds
4
Exchange
Rates
Import
Demand
Ratio of U.S.
to total
Imports
GDP
6
Domestic
Price
10
Production
Refunds
5
GDP
6
3
MREF
6
MREF
5
AREF
9
AREF
1
Supply
ESTIMATES FOR CORN
No. of
Countries
Variable
Domestic Price
Inventory
Demand
Domestic
Demand
Export
Demand
Comments
9
Variable
Countries
Domestic
Price
9
World Price
1
Import Levies
4
Exchange
Rates
6
MREF
4
AREF
5
Ratio of
Production to
Consumption
11
Consumption
3
Opening
Stocks
7
MREF
12
AREF
12
GDP
9
Ratio of U.S.
to total
Imports
Domestic Price
4
GDP
7
World Price
5
11
Export
Refunds
Domestic
Price
7
Production
Refunds
6
GDP
5
Import
Deman
d
Supply
Exchange
Rates
8
MREF
3
MREF
3
AREF
6
AREF
5
ESTIMATES FOR BARLEY
No. of
Countries
Variable
Inventory
Demand
Domestic
Demand
Export
Demand
Domestic Price
7
Ratio of
Production to
Consumption
13
Consumption
7
Comments
Import
Demand
Variable
Countires
Domestic
Price
6
World Price
1
Import Levies
4
Exchange
Rates
1
MREF
5
3
Opening
Stocks
4
MREF
11
AREF
AREF
12
GDP
11
Ratio of U.S.
to total
Imports
Domestic Price
3
GDP
7
World Price
0
Domestic
Price
11
Production
Refunds
8
GDP
6
Export
Refunds
5
Exchange
Rates
5
MREF
2
MREF
7
AREF
4
AREF
11
Supply
ESTIMATES FOR OATS
No. of
Countries
Variable
Inventory
Demand
Domestic
Demand
Export
Demand
Domestic Price
5
Ratio of
Production to
Consumption
12
Consumption
7
Comments
Import
Demand
Variable
Countries
Domestic
Price
3
World Price
0
Import Levies
2
Exchange
Rates
6
MREF
6
5
Opening
Stocks
4
MREF
7
AREF
AREF
10
GDP
9
Ratio of U.S.
to total
Imports
Domestic Price
5
GDP
4
World Price
2
Domestic
Price
5
Production
Refunds
5
GDP
3
Export
Refunds
2
Exchange
Rates
3
MREF
6
MREF
5
AREF
5
AREF
4
Supply