CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Background Information regarding Herd Size Projections for RAINS based on CAPRI results - Wolfgang Britz, Institute for Agricultural Policy, Bonn - CAPRI Common Agricultural Policy Regional Impact

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Outline What is CAPRI ? Drivers in agricultural markets Drivers at farm level Effects of the new CAP reform (July 2003) Conclusions

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI What is CAPRI ? Common Agricultural Policy Regionalised Impact analysis on regionalised level (NUTS II) on whole agricultural sector: all outputs/inputs covered based on a quantitative economic modelling system developed and maintained by an independent network of research institutions mainly funded by DG-RSRCH framework programs

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI.. what is CAPRI ? Modelling system consists of Regionalised data base Supply Module Market Module Exploitation and Reporting tools

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI.. what is CAPRI ? Market Module Spatial Multi-Commodity Model 11 regional aggregates plus all EU MS States Young Animal Market Module Linked MS Programming Models Supply Module 200 Regional or 1050 Farm Type Programming Models Perennial Sub-Module Policy Modules CAP Premiums (base areas,...) Aggregated Supply & Feed demand Aggregation Herds Acreages PricesPremiums Exploitation Env. Indicators Welfare analysis FEOGA budget

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI.. what is CAPRI ? Recent impact analysis (2002/2003) of: MTR/July 2003 reform package Sugar market reform options Tradable permits for GWPs Further trade liberalisation steps

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Micro equilibrium Market equilibrium Two fundamentals SupplyDemand = Prices Earnings Costs =

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI What drives the markets ? Final demand: development of consumption pattern population and income growth Willingness to pay Marginal Costs Supply: development of technology prices of inputs Prices

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI What drives the markets ? Final demand trends lined up with DG-AGRI outlooks/FAPRI/FAO (currently no own projections) Comprise effect of population/income growth and consumption trends.. But price/income dependent in counterfactual scenarios Price framework depends on long-term trends in agricultural world markets plus effect of domestic and trade policy … interplay between these trends and supply model

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI What drives the meat markets ? Total meat demand per capita projected to increase by +3.5% ( ) to 90 kg pc, beef drops (-5%), pig (+5%) and poultry (+9%) increase In combination with population growth: +6% higher meat consumption Less market interventions in beef markets (lower administrative prices) => price pressure Border protection prevents sizeable imports

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI What drives the dairy markets ? Past consumption trends continue: less butter and cream consumption, more cheese High border protection, but reduced policy intervention let internal prices drop.. But supply still determined by milk quota regime (quota expansion by 2.4 %)

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI What drives cereals markets ? Cereals yield continue to increase (+15% or 1.2% p.a.), but price pressure let areas drop (-5%) Similar developments in oilseeds Food demand for cereals increase by +8%, feed by +5% => net exports increase Cereal prices drop by 21% (in real terms, about constant in nominal terms) due to reduced administrative prices and long-term trends in world markets

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Micro equilibrium Market equilibrium Remember: Two fundamentals SupplyDemand = Prices Earnings Costs =

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI What drives herds and areas ? Market revenues Premiums Fixed factors costs Variable input costsEarnings Costs

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Development of earnings Outputs Meat/MilkYoung animalManure Prices Market revenues Earnings Premiums Milk yield increase by 1.8% p.a. (technical progress) Beef slaughter weights increase slightly (less calves) More piglets per sow (+14% or 1.1% pa) Manure output per head depends on live weight/milk yield Outputs Meat/MilkYoung animalManure

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Development of earnings Outputs Meat/MilkYoung animalManure Market revenues Earnings Premiums Milk (-12%) and meat prices (-20%) drop in real terms following cuts in administrative prices (dairy, beef)... But milk quotas remain binding Young animal prices follow meat price trends Prices

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Development of earnings Outputs Meat/MilkYoung animalManure Market revenues Earnings Premiums New dairy premiums help to keep quota bindings Premiums are devaluated by inflation Especially important for suckler cows => past herd expansion for suckler cow trends flattened Prices Premiums

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Development of costs Inputs FeedRemonteOther inputs Prices Fixed factors costs Costs Variable input costs Inputs FeedRemonteOther inputs Lower feed costs: cereals prices drop, smaller herds reduce fodder input (grass, silage) per unit of output Piglet prices drop (-20%), young cattle price constant Input saving technical progress for other inputs

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Development of fixed factor costs Inputs FeedRemonteOther inputs Prices Fixed factors costs Costs Variable input costs Only implicitly in the model (econometric dual cost function approach) “shadows” structural change and part of technical progress sizeable t.p. in pig and poultry (1,5 % p.a.) Fixed factors costs

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI What drives a herd size ? Outputs Inputs Meat/MilkYoung animalManure Prices Market revenues Earnings Premiums FeedRemonteOther inputs Prices Fixed factors costs Costs Variable input costs

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Fertilisers Supply models comprise N/P/K balance Crop need derived from export of nutrient by harvested material... covered by Anorganic fertiliser, can be bought at fixed prices and/or manure Losses of ammonia handled according to IPCC standards.. “availability” factors for N,P,K lined up with fertiliser use expost

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI The new CAP (July 2003) „Decoupled income support“ by farm premium Before: premiums linked to production (per slaughtered head, per ha..) Now: premiums paid (almost) independent of production, as long as sufficient hectares are kept in „good agricultural conditions“ (farmed or correctly idled) However: Member States can keep part of the coupled schemes Not all crops are “eligible”

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Impact of July reform package I Assumption: Member State use full decoupling Main effect: farmers who had to use coupled premiums to cover variable costs will now produce less, but earn more Activities most affected: Suckler cows, beef fattening, durum wheat Reduced supply raises market prices (cereals, beef) Higher beef price increases demand for pig and poultry Higher feed prices increase prices for pig and poultry More idling land, extensification of crop production

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Impact of July reform package II Reduced fertiliser input <= lower yields, idling land lower GWP from fertiliser production lower background emission from soils Lower herd size of beef cattle and suckler cow, somewhat higher milk yield (pressure from calves markets) methane output drops Estimated impact on agricultural GWP (direct and indirect) -2.1 % But remember: exact implementation not yet known..

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Summary High border protection in meat markets links consumption and supply trends For cattle, milk quota regime and young animal availability are other important drivers Revision of base line will become necessary to capture the effect of CAP reform package... But implementation strategy of Member States yet unknown, but probably decisive

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Thanks for your attention !

CAPRI EAA workshop on agricultural projection for RAINS, , Brussels CAPRI Main drivers beef Calves born Dairy cows Milk yields Milk quotas Suckler cows Premiums Heifers fattening Oxs & Bulls Calves fattening Calves raising Young heifers/bulls Heifers raising