1. 1 Introducing Direct Payments in Central European Countries Martin Banse Institute of Agricultural Economics University of Göttingen EU Modelling Workshop New Challenges in Modelling EU Agriculture and Agricultural Policy

2. 2 Table of Content How are Direct Payments Modelled in ESIM Scenario Assumptions Results of the Different Accession Scenarios Conclusions or ‘What needs to be done?’

3. 3 CAP Policy Instruments in ESIM Price policies Trade policiesSupply management Income policies Cerealsminimum price export subsidies/taxes import tariffs Obligatory set aside direct payments coupled to area OilseedsObligatory set aside direct payments coupled to area Sugarminimum price Import tariffsQuota MilkQuotadirect payments coupled to dairy cattle Dairy Products minimum price Export subisdies/tariffs direct payments coupled to beef cattle Beef and vealminimum price Export subisdies/tariffs Other meatMaximum export quantities

4. 4 CAP Policy Instruments in ESIM Price policies Trade policiesSupply management Income policies Cerealsminimum price export subsidies/taxes import tariffs Obligatory set aside direct payments coupled to area OilseedsObligatory set aside direct payments coupled to area Sugarminimum price Import tariffsQuota MilkQuotadirect payments coupled to dairy cattle Dairy Products minimum price Export subisdies/tariffs direct payments coupled to beef cattle Beef and vealminimum price Export subisdies/tariffs Other meatMaximum export quantities

5. 5 How are Direct Payments Modelled in ESIM: Supply is modelled by separate herd/area and yield function For livestock the herd function is affected by direct payments H lvst,c = f (PP lvst,c, EDP lvst,c, capc c, wagc c ) For crops the yield function is affected by direct payments EA cr,c =f (PP cr,c, EDP cr,c, capc c, wagc c, sa c, ta c )

6. 6 Direct Payments in ESIM (Crops): EA cr,c =f (PP cr,c, EDP cr,c, capc c, wagc c, sa c, ta c ) where EDP cereals,c is the direct payment per ton of actual produce per hectare, dpc EU is the direct payment for cereals per ton of base yield, er EU is the exchange rate vs. USD, er c is the exchange rate of country c byc c is the base yield and Y cereals,c is the actual yield.

7. 7 Direct Payments in ESIM (Crops): dpc are defined as an amount of € per ton of base yield for cereals (byc), which is the average weighted cereal yield of 1989 to 1991 of the EU-15. For the CECs the base yield is obtained by averaging the yields of three years prior to accession. The payment per hectare is the simple product out of these two factors. For modelling purposes the original formula as applied in the CAP is adjusted for the actual yield, i.e. actual payments per ton of produce are applied

8. 8 Direct Payments in ESIM (Livestock): H lvst,c = f (PP lvst,c, EDP lvst,c, capc c, wagc c ) EDP lvst adjusts the policy parameter bound to heads to a payment per ton of actual production

9. 9 Budgetary Calculations: ESIM generates projections only for net expenditure on trade measures, compensatory and headage payments. Conversion factors to include expenditure on administration, storage and policy measures not modelled in ESIM To calculate total FEOGA spending after accession projections on commodities not included in ESIM (goat and sheep, vegetables, tobacco)

10. 10 Scenarios: Status Quo EU-15: No Accession Status Quo EU-27: Accession to the EU in 2005 (Bulgaria and Romania in 2007) under current acquis Moderate Reform EU-27: Threshold for structural aid (80% of av. GDP) and co- financing direct payments Substantial Reform EU-27: Threshold for structural aid (90% of av. GDP) and phasing out of de-coupled direct payments

11. 11 Scenario Results (in Mio. €, 2013)

12. 12 Further Information: Ecomomic Bulletin # 10-2001 of DIW (German Institue of Economic Research) available under: www.diw.de

13. 13 Conclusions or Open Questions Direct payment modelled as component of herd/yield function Other approaches? Even under fully de-coupled direct payments production incentive?