The economic model in the ELPEN system Petra Jägersberg, Martin van der Beek, Peter Hinrichs

Progress December 2002 to February 2003 Technical validation of the economic model Scenario studies (milk quota exit) with typical farms

3-step approach Step 1: Check of input data Step 2: Model calculation and check of result data Step 3: Check of calculation rules

Check of input data Step 1: Test set with all input variables (244) for a selection of 10 model farms Step 2: Plausibility check of input variables Step 3: Check of calculation rules for internal calculated input variables, check of missing values, check of units, etc. Step 4: Improvements in first configuration of Economic model in the Elpen system

Check of result data Step 1: FADN variables contain logical values Step 2: Calculate with the test data set for Austria in the model Step 3: Compare the results of the test data set calculated within the Elpen system and of the test data set calculated with the original Excel model

Check of calculation rules Step 1: Identify differences in results Step 2: Check if calculation rules are plausible Step 3: Corrections in the configuration of the calculation rules in the Elpen system Step 4: Confirm identical results for the test data set inside and outside the Elpen system Technical validation is finalised

Further work Vulnerable farms –Farm groups (averages) & single farm data sets Knowledge rules on income, liquidity, and farm development Behavioral model –with regard to scenario studies from LP model analysis (FAL, INRA) and typical farms (IFCN panel farms) Knowledge rules on farmers´ behavior Projected impacts on incomes, production and regional markets

Vulnerability Definition: –as given in Brussels, June 2001 Criteria –Short-term: Available cash –Long-term: Rentability (incl. accounting the opportunity costs of family-owned factors) Problem: Results were not convincing in too many cases.

Vulnerability - Problems Country- and year-specific subsidies (A, SF) Country-specific bookkeeping rules and practice, Examples: –Family labour in Italy, –Forestry output in Sweden, –Revaluation of assets (Italy), –Different beginning and end of acconting period, accessing different phases of price cycles, –Neglecting the quota costs in many countries. Severe data errors in single-farm data sets.

Vulnerability – Problems (cont.) Steps taken to overcome the problems: Direct assessment of milk production costs versus milk prices (Goertz/Jaegersberg-approach), Plausi-checking milk quantities and prices, removing inconsistent farm groups, Confine vulnerability problems to dairy farms (EU- type 41 or similarly defined) and/or to groups with meaningful amount of milk production.

Farmers’ reactions to policy actions Policy effect in view: Reduction of milk price. Rules of Farmers’ behavior derived from –Economic theory, expert judgements, –Simulation models, and –Statistical analyses on past developments. verbal (not quantitative) rules at the moment. –Quota costs go down (<)1 : 1, –Specialist dairy farms will expand, mixed farms will go out, –High opportunity costs (on- and off-farm) favour outgoing, –Recent investments in buildings object to giving-up.

Further work The prices of the limiting factors determine the rentability, and decide on growth or exit from production  Ges  Successful farms would like to increase production Average farms trying to grow in order to keep their position Less successful farms tend to give up milk production Costs Farms

Further work- scenario studies D-650 cows Profit € per farm D-68 cows D-35 cows

Further work Threshold of production = short-term needed milk price Variable costs - by product sales Cash threshold (Liquidity threshold) medium-term needed milk price Threshold of production + fixed expenses + family living Threshold of profit = long-term needed milk price Full costs of production (incl. depreciation and opportunity costs on family-owned land, capital and labour) - by product sales

Further work Cash flow indicator: –Development of networth = profit + depreciation - family consumption Family consumption ? = Consumption + private assurances + share for retired farmer - non-farm income