The FAPRI-Ireland Partnership

Developing the Outlook for Irish Agriculture

Trevor Donnellan

Thia HennessyRural Economy Research Centre

Teagasc HQ

Overview

What is FAPRI-Ireland

What do we do?

How do we do it?

Aggregate Level Analysis

Farm Level Analysis

Future Developments - Interaction with Advisors

Agriculture: A Time of Change ?

Dairy farmers should not be given the impression that the present system, with its intrinsic rigidities, can last forever.

The recent debate on long-term prospects has revealed factors of uncertainty; in particular the results of the next WTO Round could also affect the dairy sector.

(European Commission 1997)

FAPRI- Ireland Partnership: Who are we?

Founded in 1997 - initiated by John Bruton (when Taoiseach)

Partners

– Teagasc (Irish Ag. and Food Dev. Authority)

– Nat. University of Ireland at Cork, Dublin, Galway, Maynooth

and Trinity College

FAPRI (Missouri -USA)

Partner Project in Northern Ireland

Background

Now in Second Phase - Continuation from Previous Project

Previous Analyses

– Commission Agenda 2000 Proposals (December 1998)

– the Final Berlin Agenda 2000 Agreement (May 1999)

– the London Club Agenda 2000 Dairy Alternative (Sept 1999)

– the impact of Exchange Movements on Farm Income (March 2000)

– the impact of a reduction or elimination of Export Subsidies (April 2001)

We Can’t Ignore the Outside World

Irish Agriculture very export dependent

Our Domestic market of lesser importance

Must understand international scene

International Policy

International Supply and Demand

Exchange rates

Linking FAPRI-Ireland to the Outside World

FAPRIWorld Model

FAPRIEU Model

Ireland Macro Economic Models

Ireland Model

Ireland Farm Model

Types of Modelling Used

Commodity Level Modelling– Econometric Modelling– individual models for each commodity– commodity models linked to form overall model

Farm Level Modelling– Linear Programming– incorporating results of commodity models– representative farms selected and modelled

Commodity Models

Farm Models

Agricultural Output: Ireland 1999

0

200

400

600

800

1000

1200

1400

1600

Eu

ro (

000)

Cattle Pigs Sheep Milk Crops Other

Commodity Models

Trevor Donnellan

Cereals

Inputs

Poultry

PigsSheep

Beef

Dairy

Milk Output Values

Beef Output Values

Sheep Output Values

Poultry Output Values

Pig Output Values

Poultry Meal Prices

Poultry NumbersPoultry PricesDairy Cow

Numbers

Dairy Meal Price Cereal Prices, Production,

Value & Hectares

Cattle Feed Price

Cattle Numbers

Cattle FeedPrice

Pig Numbers

Pig Meal Price

Beef Cow Numbers

Dairy Cow Numbers

Dai

ry C

ow

Num

bers

Commodity Model Inter Linkages

What this work is NOT

Just remind ourselves this is NOT a forecast it is a projection

Who could have forecast– China Accession– EU Expansion– Weather– 11th September ?

Projecting the Future: How do we do it?

We don’t have a crystal ball !!!!!!

Assume future policy

Relationships between data analysed

Models solved = “The Meltdown”

Results go to Farm Models

Models solved

Consultations with Experts

Final Revisions

How We Do It

Macro EconomicProjections

- WEFA, Link, DRI

Policy Assumptions

ModelAnalysis

Expert Review

Final AnalysisOr

Baseline

Our Main Ability

Is NOT that we can predict the future

We can assess impact of new policies

First we make a baseline projection

Then we look at policy changes

Produce policy change projections

Look at the difference

Baseline Policy Assumptions

Policies Currently In Place, Remain In Place

International Agreements Hold

No New Policies

No N

ew Policy

Assum

ptions

A Scenario

Elimination of Export Subsidies

Scenario:Export Subsidy Elimination

Total abolition of export subsidies 2004-2009

Related assumptions are important

– Elimination of export subsidies could lead to a large build up of

intervention stocks

– Not a credible Commission approach

– Must reduce intervention prices - so market clears

– Intervention Butter price -20% and SMP -10%

– Assume quotas remain in place up to 2010

Dairy : Export Subsidy EliminationDairy : Export Subsidy Elimination

15

17

19

21

23

25

27

29

1995 1997 1999 2001 2003 2005 2007 2009

Eur

o pe

r 10

0kg

Baseline Elimination

0

200

400

600

800

1,000

1,200

1,400

2000 2002 2004 2006 2008 2010(£

000

) mill

ion

Value of Milk Sold Direct Compensation

Irish Farm Milk Price 3.7% fat Revenue of Irish Milk sector

Under export subsidy elimination the 2010 price down 20% on 2010 baseline

2010 Value Down 20% on 2000

2010 Revenue down 13% on 2000

Beef : Export Subsidy EliminationBeef : Export Subsidy Elimination

0200400600800

1,0001,2001,4001,6001,8002,000

2000 2002 2004 2006 2008 2010(£

000

) m

illio

n

Value of Cattle Sold Direct Compensation

Irish Cattle Price Revenue of Irish Cattle

20

40

60

80

100

120

1995 1997 1999 2001 2003 2005 2007 2009

IR£

Per 1

00kg

Baseline Elimination

Under export subsidy elimination down 20% on 2010 baseline

2010 Value down 34% on 2000

2010 Revenue Down 13% on 2000

Farm Models

Thia Hennessy

How we model farms

Representative farms

Apply price projections to farms

Impact on income

Project how farmers will react

Representative Farms

National Farm Survey - 1200 farms

Not all – ‘typical farm’

Cluster Analysis

Homogenous groups

Similar size, efficiency and demographics

Representative Dairy Farms

Descriptor 1996

Area Hectares

Quota Farmed Litres

Quota Change

1992-1996Static 10800 45 95 400 0

Developer 7900 41 103 700 55%

Large 1000 123 425 700 5%

Typical 13200 44 169 000 10%

Representative Cattle Farms

Descriptor 1996

Area Hectares

Family Farm

Income

Area Change

1992-1996

No Off- Farm Employment

Off- Farm Employment

Large 4700 74 £18 250 8%Moderate 28300 33 £5 071 2%

Hobby 15000 33 £1 900 -10%Efficient 8200 36 £7 250 9%

Modelling the Farms

Static analysis - no response

Dynamic analysis – response

Programming Models

Modelling Response

Profit Maximisation – Farm net margin

Max =ctxt+ct+1xt+1+….ct+nxt+n

subject to bt<aixi+ajxj+……anxn

Complexity of agricultural policy e.g:extensification, premia schemes, livestock unit measures

Results of Static Analysis

Gross Output remains static

Price – cost squeeze

Margins are falling

Combat with economies of scale or efficiency

Run faster to standstill

Results – Typical Dairy Farm

10000

15000

20000

25000

30000

35000

1998 2000 2002 2004 2006 2008 2010

IR£

No response margin Response margin Response cashflow

By 2010 farm margins are 35% higher than in

1998 (nominal terms)

Purchasing quota leased and extra

Increase in quota farmed by 25% (47,000)

Negative impact on GM - Cashflow

Results – Typical Dairy Farm

Results – Developer Dairy Farm

0

5000

10000

15000

20000

25000

1998 2000 2002 2004 2006 2008 2010

IR£

No response margin Response Margin Cashflow

Developer farm margins up 35% by 2010

Increase in quota farmed by 35%

Large farm margins up 15% higher in 2010 than in 1998

(real loss)

Leased quota purchased no extra

Results – Developer Dairy Farm

Results Small Dairy Farm

Small dairy farm to exit

Expansion uneconomical

Price cost squeeze

Lure of off farm incomes

Part-time beef system

Results - Cattle Farms

Key to Success Maximise Premia Payments

All Farms Margins volatile from 2000-04

Small margins 30% higher in 2010 than in 1998

Extensification and SCP claimed on heifers

Off farm job not an option

Results - Cattle Farms

Large full-time margins volatile in short term

but 15% higher in 2010

Benefits from SBP limit increase and rents

more land continues as full-time farm

Results - Cattle Farms

Part-time efficient farm will maintain 1998 margins in

2010 although volatile in the intervening period

Reduce stocking rate to qualify for 1.4

Hobby farm by 2010 margins 15% below 1998

Cost structure - continue in farming?

Future Developments

To develop PAT - policy analysis tool.

PAT is a user friendly policy impact

analysis decision support tool for use in

farm planning and decision making.

Rationale

Direct payments -large portion of income

More complex criteria

Many considerations

Back of envelope planning outdated

PAT can answers questions easily

How will PAT work?

Based on FAPRI-Ireland farm models

Use FAPRI-Ireland projections & scenarios

User-friendly windows interface

Enter farm data

Initial development – user group

What answers will PATprovide?

What will my profit levels be in 5 years if I don’t change current plan?

What is my best strategy for the next 5 years?

How will a new policy scenario affect my profits?

Benefits

Of use to advisors

Information to farmers

Handle policy issues and maximise DPs

Better understanding of policy issues

Facilitates technology transfer Take policy analysis to a wider arena

So to Wrap Things Up

Some Conclusions

What Can Make This Work ‘ Wrong ‘ ?

Great uncertainty over Euro exchange rate

World Economy

Oil prices – will they or won’t they?

Weather

Different Policies pursued

Conclusions

Commodity models examine policy at aggregate level

Farm models take commodity model results and determine the effects on specific types of farms

Future Work

Reform of the CAP

More WTO Implications

Environment - Kyoto

European Models

Further Information

Further information on our work is available on our website at:

www.tnet.teagasc.ie/fapri