1. Impact of the CAP Reforms on U.S. – EU Cereal Trade
Sachin Chintawar, Lynn Kennedy, John V. Westra

2. 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

3. Common Agricultural Policy
Objectives:
Increase Agricultural Productivity
Ensure fair standard of living
Stabilize markets
Assure availability of supplies
Consumers pay reasonable prices

4. Design of the CAP Common Agricultural Policy
Structural Policies Market
European Agricultural Guidance & Guarantee Fund

5. Typical Design of the CAP for Cereals
TARGET PRICE
THRESHOLD PRICE
INTERVENTION PRICE
IMPORT LEVY EXPORT
SUBSIDY
WORLD PRICE
IMPORTS EXPORTS

6. 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.

7. Significance for Cereals
PRICE PRIOR TO REFORMS
IMPORT PRICE UNDER GATT
AREA AID PAID AT FLAT RATE (54.34 ECU/TON)
+55%
TARGET PRICES ( ECU/TON)
TARIFF EQUIVALENT
( ECU/TON
INTERVENTION PRICE (119.19)
2000 – 95 ECU/TON)
EXPORT REFUNDS
IMPORTS EXPORTS

8. Agenda 2000 Reforms Granting area payments
15% reduction in intervention prices for cereals
Increase set-aside requirements .
- Area Payment Scheme
- Regionalization Scheme
- Environmental measures

9. 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

10. Data and Methodology Five commodity fifteen country model.
U.S. considered as a trading partner.
Variables included (A)

11. 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

12. 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.

13. Econometric Model Specification
Supply Equation (I)
Demand Side System
Inventory Demand (II)
Import Demand (III)
Export Demand (IV)
Domestic Demand (V)

14. Estimation Results Results for Wheat (1) Results for Rye (2)
Results for Barley (3)
Results for Maize (4)
Results for Oats (5)

15. 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.

16. 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

18. Cereal Imports by U.S. compared to ROW

19. 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

20. Calculating Import Levies

21. Calculating World Prices
BACK

22. Calculating Export Refunds
BACK

23. Calculating Production Refunds
BACK

24. Apparent Production & Consumption
BACK

25. Supply Equation
BACK

26. Inventory Demand
BACK

27. Import Demand
BACK

28. Export Demand
BACK

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

30. 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

31. 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

32. 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

33. 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

34. 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