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Introducing Direct Payments in Central European Countries

Martin Banse

Institute of Agricultural EconomicsUniversity of Göttingen

EU Modelling WorkshopNew Challenges in Modelling EU

Agriculture and Agricultural Policy

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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?’

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CAP Policy Instruments in ESIM

Price policies

Trade policies Supply management

Income policies

Cereals minimum price

export subsidies/taxesimport tariffs

Obligatory set aside

direct payments coupled to area

Oilseeds Obligatory set aside

direct payments coupled to area

Sugar minimum price

Import tariffs Quota

Milk Quota direct payments coupled to dairy cattle

Dairy Products

minimum price

Export subisdies/tariffs

direct payments coupled to beef cattle

Beef and veal minimum price

Export subisdies/tariffs

Other meat Maximum export quantities

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CAP Policy Instruments in ESIM

Price policies

Trade policies Supply management

Income policies

Cereals minimum price

export subsidies/taxesimport tariffs

Obligatory set aside

direct payments coupled to area

Oilseeds Obligatory set aside

direct payments coupled to area

Sugar minimum price

Import tariffs Quota

Milk Quota direct payments coupled to dairy cattle

Dairy Products

minimum price

Export subisdies/tariffs

direct payments coupled to beef cattle

Beef and veal minimum price

Export subisdies/tariffs

Other meat Maximum export quantities

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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 paymentsHlvst,c = f (PPlvst,c, EDPlvst,c, capcc, wagcc)

• For crops the yield function is affected by direct paymentsEAcr,c=f (PPcr,c, EDPcr,c, capcc, wagcc, sac, tac)

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Direct Payments in ESIM (Crops):

EAcr,c=f (PPcr,c, EDPcr,c, capcc, wagcc, sac, tac)

Y

byc

er

erEDP

ccereals

c

c

EUEUccereals dpc

,,

where

EDPcereals,c is the direct payment per ton of actual produce per hectare,

dpcEU is the direct payment for cereals per ton of base yield,

erEU is the exchange rate vs. USD,

erc is the exchange rate of country c

bycc is the base yield and

Ycereals,c is the actual yield.

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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

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Direct Payments in ESIM (Livestock):

Hlvst,c = f (PPlvst,c, EDPlvst,c, capcc, wagcc)

EDPlvst adjusts the policy parameter bound to heads to a payment per ton of actual production

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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)

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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

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Scenario Results (in Mio. €, 2013)

Total oper. expenditure

Structural policy

Agricultural policy Contributions

Net Transfers

Status quo EU-15EU- 15 65779 21384 38345 65779As % of EU- 15 GDP 0.63 0.21 0.37 0.63

Status quo EU-27EU- 15 49186 5898 38239 81241 - 3205512 accession candidates 37296 22100 13805 5241 32055EU- 27 86482 27998 52045 86482As % of EU- 27 GDP 0.78 0.25 0.47 0.78

Moderate Reform EU-27EU- 15 43407 10657 27702 71511 - 2810512 accession candidates 32718 22100 9227 4614 28105EU- 27 76125 32757 36929 76125As % of EU- 27 GDP 0.69 0.3 0.33 0.69

Substantial Reform EU-27EU- 15 33795 4414 24333 59847 - 2605112 accession candidates 29912 21500 7021 3861 26051EU- 27 63708 25914 31354 63708As % of EU- 27 GDP 0.57 0.23 0.28 0.57

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Further Information:

Ecomomic Bulletin # 10-2001 of DIW (German Institue of Economic Research)

available under: www.diw.de

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Conclusions or Open Questions

• Direct payment modelled as component of herd/yield function

• Other approaches?• Even under fully de-coupled direct

payments production incentive?