Impact of the CAP Reforms on U.S. – EU Cereal Trade
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Transcript of Impact of the CAP Reforms on U.S. – EU Cereal Trade
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 (V)Domestic Demand (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
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5000000
10000000
15000000
20000000
25000000
30000000
35000000
1976
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1982
1984
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1990
1992
1994
1996
1998
2000
2002
2004
Met
ric
To
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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
VariableNo. of Countries
Comments
Inventory Demand
Domestic Price
8
Ratio of Production to Consumption
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
VariableNo. of Countries
Comments
Inventory Demand
Domestic Price 9
Ratio of Production to Consumption
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
Ratio of U.S. to total Imports
GDP 7
Supply
Domestic Price
11
Production Refunds
6
GDP 5
MREF 3
AREF 5
ESTIMATES FOR BARLEY
VariableNo. of Countries
Comments
Inventory Demand
Domestic Price 7
Ratio of Production to Consumption
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
Ratio of U.S. to total Imports
GDP 7
Supply
Domestic Price
11
Production Refunds
8
GDP 6
MREF 7
AREF 11
ESTIMATES FOR OATS
VariableNo. of Countries
Comments
Inventory Demand
Domestic Price 5
Ratio of Production to Consumption
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
Ratio of U.S. to total Imports
GDP 4
Supply
Domestic Price
5
Production Refunds
5
GDP 3
MREF 5
AREF 4