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 Exchange rates changes in the EU Expiration of the Blair House Accord GATT and WTO Compliance – compelling factors to reforms of the CAP

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 EXPORT SUBSIDY WORLD PRICE IMPORTS 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 (II) Import Demand (III) Export Demand (IV) Domestic Demand (V)

Estimation Results Results for Wheat (1) Results for Rye (2) Results for Barley (3) Results for Maize (4) Results for Oats (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

BACK lndmpr Log of Domestic Price U.S. Dollars per Ton 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 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 lngdp Log of Gross Domestic Product Million U.S. Dollars lnworldp Log of World Price lnexpr Log of Export Refund lnexrt Log of Exchange Rates Domestic Currency per U.S. Dollar lnimpl Log of Import Levies lnimpqu/lnimpq Log of Ratio of Imports from United States to Total Imports lnprodr Log of Production Refunds lnexpq Log of Export Quantity lnimpq Log of Import Quantity lnprod Log of Domestic Production BACK

Calculating Import Levies

Calculating World Prices BACK

Calculating Export Refunds BACK

Calculating Production Refunds BACK

Apparent Production & Consumption BACK

Supply Equation BACK

Inventory Demand BACK

Import Demand BACK

Export Demand BACK

Domestic Demand BACK Inverse Demand Function – Equation Normalizing on Prices – thus closing the model

ESTIMATES FOR WHEAT Variable No. 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 Export Demand 4 World Price 2 Export Refunds Exchange Rates 5 Variable Countires Import Demand Domestic Price 4 World Price 6 Import Levies 3 Exchange Rates 5 MREF AREF Ratio of U.S. to total Imports 10 GDP 9 Supply 11 Production Refunds 8

ESTIMATES FOR RYE Variable No. 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 Export Demand 5 World Price 6 Export Refunds Exchange Rates 3 1 Variable Countries Import Demand Domestic Price 12 World Price Import Levies 4 Exchange Rates 3 MREF AREF Ratio of U.S. to total Imports GDP 6 Supply 10 Production Refunds 5 9

ESTIMATES FOR CORN Variable No. of Countries Comments Inventory Demand Domestic Price 9 Ratio of Production to Consumption 11 Domestic Demand Consumption 3 Opening Stocks 7 MREF 12 AREF GDP Export Demand 4 World Price 5 Export Refunds Exchange Rates 8 6 Variable Countries Import Demand Domestic Price 9 World Price 1 Import Levies 4 Exchange Rates 6 MREF AREF 5 Ratio of U.S. to total Imports GDP 7 Supply 11 Production Refunds 3

ESTIMATES FOR BARLEY Variable No. of Countries Comments Inventory Demand Domestic Price 7 Ratio of Production to Consumption 13 Domestic Demand Consumption Opening Stocks 4 MREF 11 AREF 12 GDP Export Demand 3 World Price Export Refunds 5 Exchange Rates 2 Variable Countires Import Demand Domestic Price 6 World Price 1 Import Levies 4 Exchange Rates MREF 5 AREF 3 Ratio of U.S. to total Imports GDP 7 Supply 11 Production Refunds 8

ESTIMATES FOR OATS Variable No. of Countries Comments Inventory Demand Domestic Price 5 Ratio of Production to Consumption 12 Domestic Demand Consumption 7 Opening Stocks 4 MREF AREF 10 GDP 9 Export Demand World Price 2 Export Refunds Exchange Rates 3 6 Variable Countries Import Demand Domestic Price 3 World Price Import Levies 2 Exchange Rates 6 MREF AREF 5 Ratio of U.S. to total Imports GDP 4 Supply Production Refunds