Agricultural production in Finland up to 2020 Sector level analysis Heikki Lehtonen MTT Agrifood Research Finland /Economic Research (MTTL) October 8 2003

Contents Scenarios of agricultural policy Research Method Likely impacts of policy changes on agricultural production Some effects on potential nutrient run-offs Conclusions

Scenarios of agricultural policy Base; Agenda 2000 MTR (Mid Term Review of Agenda 2000) MTR1 MTR2

Base No changes in Agenda 2000 CAP reform -agreement (Agreed in Berlin 1999); changes in prices of dairy products expected in 2005-2008; compensatory payments per milk quota ton all other supports at the 2003 level

Mid Term Review 1 (MTR1) MTR CAP reform agreed in June 26 2003; partial de-coupling of direct payments, reductions in dairy product prices Certain cross compliance criteria imply that land has to be cultivated or kept as set-aside in order to be eligible for support Either farm specific de-coupled payments per hectare, or uniform de-coupled payments per hectare on a larger region 25% CAP area supports as well an increased aid for grain drying (24 euros/ton; paid only in Finland and in northern part of Sweden) remain production linked It is assumed that slaughter premia are paid per animal, bull premia fully de-coupled (this is one of the three alternatives)

Mid Term Review 1(MTR1) (continued (1)) Some other assumptions that need to be updated National supports, including animal premia on A- and B- support regions, remain at 2003 level until 2020 LFA- environmental supports at 2003 level until 2020

Mid Term Review 1(MTR1) (continued (2)) Milk quotas are retained, but increased by 1,5 % until 2008/2009 Reductions of intervention prices of butter (-25 %) and skimmed milk powder (-15%) during 2004-2008  Producer prices of milk decrease by 22 % until 2008 Compensatory payment of 35.5 euros/ton of quota Compensatory payments fully de-coupled at 2008

Mid Term Review 1(MTR1) (continued (3)) All CAP-support (both coupled and de-coupled) exceeding 5,000 euros/farm are reduced by 3% in 2005 4% in 2006 5% in 2007 and later Investment support at Agenda 2000 level

Mid Term Review 2 (MTR2) Equal to MTR 1, but a favourable market situation and price development assumed in the EU and world markets; Price reduction of milk, as seen from the farm level (producer price), decreases by only 16%

Research method A dynamic regional sector model DREMFIA based on microeconomic theory of profit maximisation simulates agricultural production Level of agricultural production depends on both absolute and relative profitability Use of inputs depends on the relative prices of inputs and outputs Finland is divided in 4 main regions, and these are further divided into subregions based on support areas; in total 17 regions

Likely impacts of the CAP reform scenarios on production Significant impacts only in medium (5-10 years) and long run (10-20 years) Rate of change accelerates over time if investments change One should look at structural changes in production, not only individual production activities and use of inputs when evaluating environmental impacts of policies

CAP -support per hectare on beef farms (39 farms; FADN) in Finland

Changes in operating margin (after variable costs) per bull on Finnish beef farms: Agenda 2000; 40% of slaughter premium coupled; 100% of slaughter premium coupled; 75% of male premium coupled; at different fodder unit costs of silage grass

Dairy investments (mill Dairy investments (mill. euros) Gross investments at sector level in Finland

Dairy investments (mill. euros) in different farm size groups

Dairy capital (mill. euros)

Dairy capital (mill. euros) in different farm size groups

Milk production volume (mill. litres)

Producer price of milk (euros/litre)

Grass area (1000 ha)

Set-aside area (1000 ha) mainly green set-aside

Grain area (1000 ha) mainly feed grain

Unused area (1000 ha) zero economic rent from agriculture on this area

Beef production (mill. kg)

Bovine animal units (1000)

Pig animal units (1000)

Poultry animal units (1000)

Average nitrogen balance (kg/ha) average farm gate balance

Average nitrogen balance (kg/ha) on grass area average farm gate balance

Average phosphorous balance (kg/ha)

Average phosphorous balance per grass hectare (kg/ha)

Conclusions Decreasing product prices and de-coupling result in lower production volumes and more extensive cultivation De-coupling compensatory payments for milk reduces the share of concentrates in feeding of dairy cows However, extensive production and reduced nutrient balances do not take place in all regions production concentrates regionally product prices may not reduce much if aggregate supply decreases