IMPACTS OF EU INTEGRATION ON TURKISH AGRICULTURE Erol H. CAKMAK H. Ozan ERUYGUR Middle East Technical University (METU) Department of Economics Ankara/Turkey EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

EU-MED AGPOL PARIS MEETING Research Questions What are the potential impacts of the following paths on Turkish agricultural production, consumption and trade in 2015? Current policy “status quo”, A new WTO agreement in 2015, Turkey’s EU membership in 2015. EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

EU-MED AGPOL PARIS MEETING Model Structure Model maximizes the sum of consumers' and producers' surplus, hence output prices are endogeneous to the model. A single period static optimization model. A non-linear programming model. EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

EU-MED AGPOL PARIS MEETING Model Structure Crop and livestock sub-sectors are integrated endogenously: Livestock sub-sector gets inputs from crop production. Foreign trade is allowed in raw and in raw equivalent form for processed products. Foreign trade is differentiated for EU, USA and ROW. EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

EU-MED AGPOL PARIS MEETING SCENARIOS & RESULTS Two sets of scenarios are defined and analyzed for their impacts in the year 2015. Non-EU Scenarios EU-OUT (Baseline scenario) WTO (15 % decrease in WTO binding tariff commitments of Turkey) EU Scenarios EU-CU (Customs Union with the EU is extended to agricultural products) EU-IN1 (Turkey is a member of EU) EU-IN2 (Turkey is a member of EU, double yield growth until 2015) EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

First Set: NON-EU Scenarios EU-OUT Baseline scenario The tariff and protection levels of Turkey are different from that of EU There are tariffs and import subsidies for EU-Turkey agricultural trade. There are deficiency payments. EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

Model calibrated to base period values and 2004 policy parameters Baseline Scenario Projection of the model to a predetermined period assuming that that there is no change in the current agricultural policy. Projection is done imposing plausible changes in exogenous parameters such as population, income, import and export prices, input prices, yields and resource endowments. Apart from the base period, it provides an additional benchmark for the evaluation of the changing policy environment. Base Period Model (2002-04) 2004 Policies (Status Quo) Year: 2004 Model calibrated to base period values and 2004 policy parameters Baseline Model (2015) 2004 Policies (Status Quo) Year: 2015 Model projected to 2015 Projection to 2015 Impose estimated changes in population, income, import and export prices, input prices, yields and resource endowments until 2015 GME-OLS 2-step estimation process to forecast the values of these parameters in 2015 Policy Change Scenarios in 2015 Reduction in WTO binding tariffs in 2015 Turkey integrates with the EU IMPACTS EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

Common Assumptions for Scenarios (2015 Projection Assumptions) 1.4 percent population growth per year Population growth rate is determined from FAOSTAT estimates 1.3 percent net per capita income growth per year. GDP per capita with 1987 prices (real) serie of CBRT is used, a linear trend is regressed. 210,000 ha increase in irrigated area; of which 150,000 ha come from GAP region and 60,000 ha come from rest of the Turkey. Prices are adjusted to 2015 using FAPRI (2005) price projections and FAO export unit values data (1961-2004). Yield Increases until 2015 included. The yield growths are estimated using last 10 years data with GME taken last 45 years data estimates with OLS as support vector center points, i.e., a priori information. However, all simulations (except EU-IN2) are performed following a “conservative” attitude in which only the half of the estimated yield growths until 2015 are used. EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

First Set: NON-EU Scenarios WTO Same as Baseline Scenario (EU-OUT) except It assumes that there will be 15 percent decrease in Turkey’s binding WTO tariff commitments in 2015. EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

General Results (WTO Simulation) Total surplus is not affected Negligible decrease in producers’ surplus Consumers’ surplus increases by 1% Impact on production volume is small Overall price level falls by 2% with 4% decrease in livestock product prices 4 % increase in the volume of livestock consumption with relatively negligible expansion in the consumption expenditures. Net imports of livestock products increase by USD 250 million Net exports of crop products are not affected

General Results (WTO Simulation) Turkish crop sector does not seem to be affected. Impacts on crop production, consumption, net exports and prices are negligible. Livestock sector can be affected to a limited extent. Prices fall 4%, net imports expand 53%, consumption volume increases 4% and production revenue decreases by 5%.

Second Set: EU Scenarios EU-CU represents the customs union scenario. Customs union agreement between EU and Turkey is extended to cover the agricultural products, There is EU intervention purchases, The protection and import subsidy levels of Turkey are at the same levels as EU. Tariffs and import subsidies are removed for EU-Turkey trade in agricultural products. EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

Second Set: EU Scenarios EU-IN1 represents the first membership scenario. There is EU intervention purchases, The compensatory direct payments for cereals, oilseeds and protein crops and compulsory set-aside regulations of EU apply fully to Turkey. Turkey is also eligible for other subsidies implemented in the EU, i.e. payments for durum wheat, tobacco, olive oil, cotton, milk, beef and sheep meat. The protection and import subsidy levels of Turkey are at the same levels as EU. Tariffs and import subsidies are removed for EU-Turkey trade in agricultural products. EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

Second Set: EU Scenarios EU-IN2 represents the second membership scenario. Policy framework for EU-IN2 is the same as EU-IN1. Only difference is the fact that the EU-IN2 scenario is the optimistic version of EU-IN1: Exact estimated values for yield growth rates are used in this simulation EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

General Results for EU Integration Scenarios Impact on total surplus is small. But, with full CAP payments, it increases by 2% Without full CAP supports, producers’ surplus declines slightly. With Full CAP supports, producers’ surplus increases, 1%. Consumers’ surplus increases significantly in membership (12%) Impact on total production volume is limited: it posts 6% decrease With membership, overall price level goes down by 14% Livestock product prices fall sharply by about 25% Volume of total consumption increases (11%) but the expenditure on total consumption declines (6%). Hence relatively high consumption levels are achieved at much lower costs under EU scenarios. This pattern is observed more significantly in the consumption of livestock products.

General Results for EU Integration Scenarios Under EU scenarios, Turkey seems to become net importer of agricultural products since Turkey’s net exports of crop products will not be able to compensate the boom in the net imports of livestock products. Under membership, obligatory set-aside regulations of CAP (for cereals and oil-seeds) affect the production volume and trade. However, with higher yield growth performances, volume of net imports may decline significantly. This shows the effectiveness of technological improvement.

Apart from livestock products, net imports of cereal and oilseeds can record large expansions under membership or customs union. Particularly, corn and wheat net imports expand. Impacts on Net Exports

On the other hand, net exports of Pulses, Vegetables and Fruits & Nuts expand under membership or customs union. Particularly, chickpeas (pulses), peppers, tomatos, cucumbers (veg.) and hazelnut, apples, apricot and citrus (Fruits & Nuts). Net Exports (USD million) 2002-04 TOTAL USA EU ROW CROP PRODUCTS 2537 -604 2610 1330 3336 -611 1477 1363 2228 CEREALS -240 -233 -81 -8.0 -322 -1199 42 -1390 PULSES 190 1.4 45 237 1.5 51 202 255 INDUSTRIAL CROPS 615 69 551 103 724 523 113 705 OILSEEDS -747 -632 2.9 -293 -922 -190 -1115 TUBERS 55 0.0 4.1 79 83 76 80 VEGETABLES 598 59 354 451 864 58 407 430 895 FRUITS AND NUTS 2064 132 1734 807 2672 125 1882 791 2798 LIVESTOCK & POUL. -273 7.4 -249 -235 -476 -3479 -3704 MEAT 11 1.8 2 -2168 -2157 MILK -14 0.5 20 21 -899 23 -876 HIDE, WOOL & HAIR -290 7.0 -250 -275 -517 6.9 -248 -287 -528 POULTRY 19 -164 -144 2264 -596 2361 1095 2860 -2002 1130 -1476 EU-OUT (2015) EU-CU (2015)

EU-MED AGPOL PARIS MEETING CONCLUSION Non-EU simulations’ results point out some remarks. Under status quo (EU-OUT), model projects significant price increases for livestock products, particularly for meat and milk, in 2015. 15 percent reduction in Turkey’s WTO tariff rate commitments will be beneficial to consumers with a small negative impact on the welfare of producers (WTO simulation). Net imports increase by about USD 250 million (due to the expansion in meat imports). EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

EU-MED AGPOL PARIS MEETING CONCLUSION Results for the EU scenarios may be summarized briefly as follows. Overall welfare affect is small. Consumers will definitely benefit from EU integration due to declining prices. Increased consumption will be realized with a lower level of expenditure. CAP supports are effective for the welfare of producers. EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

EU-MED AGPOL PARIS MEETING CONCLUSION Livestock products will not be competitive. However, last 5 years’ increasing yield trends in livestock products shows better performances than before (TASM-EU). Net exports of crop products will be far from compensating the increase in the net imports of livestock products. Technological improvement is important. EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

EU-MED AGPOL PARIS MEETING Thank you EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

CAP Payment Estimates (EU-IN1) EROL H. CAKMAK EU-MED AGPOL PARIS MEETING

CAP Payment Estimates (EU-IN2) EROL H. CAKMAK EU-MED AGPOL PARIS MEETING