Fødevareøkonomisk Institut EU dairy policy analysis: Exploring the importance of quota rent estimates By Research Fellow Chantal Pohl Nielsen
Jan 09, 2016
Fødevareøkonomisk Institut
EU dairy policy analysis:
Exploring the importance of
quota rent estimates
By
Research Fellow
Chantal Pohl Nielsen
Fødevareøkonomisk Institut
Why dairy ? Why quota rents ?
• Dairy remains one of the most protected sectors in the EU
– Price support, intervention purchases, production quotas, import tariffs,
TRQs, domestic consumption and export subsidies
• The EU is a dominant player on world dairy markets
– 36% of production
– 27% of exports
– 14% of imports
• 2003 CAP reform fine-tunes the dairy policy
– Fast-tracking certain price cuts, limiting intervention purchases,
decoupling compensatory payments
– Production quotas prolonged until 2014/15
Fødevareøkonomisk Institut
Objective
• To discuss the level of milk quota rents in the EU
– What are the correct estimates for the individual EU member countries?
– What are the underlying assumptions re. e.g. farmers’ expectations?
• To illustrate the impact of using different initial quota rents
when analysing EU dairy policy reform using CGE models and to stress the
importance of recognising EU heterogeneity
• To emphasise the need for further data work
Fødevareøkonomisk Institut
(a) Price
Quantity
PM
PS
Supply
Demand
A Quota
(b) Price
Quantity
PM’
PS’
Supply
Demand
A B C Quota
Binding production quotas generate rents
Fødevareøkonomisk Institut
(a) Price
Quantity
PM
PS
Supply
Demand
A Quota
(b) Price
Quantity
PM’
PS’
Supply
Demand
A B C Quota
Supply ' Supply '
Binding production quotas generate rents – but how large?
Fødevareøkonomisk Institut
Problem of unobservable marginal cost curves
• Determining the size of quota rents amounts to determining whether
a country is capable of competing (unsupported) on world markets
• Analytical, we’re trying to determine the position of a country’s supply
curve in an unregulated market, i.e. unobservable.
Approaches taken in the literature:
• Direct: Estimates of marginal costs using farm accounts
• Indirect: Quota prices (rent or lease) supplemented by assumptions
about the annual value of quota
- Which real interest rate ? Length of depreciation time ?
Farmers’ expectations re. future compensation ?
All important assumptions – with implications for the evaluation of the effects of dairy policy reform
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The Danish case…
Fødevareøkonomisk Institut
2 4 6 7 8 10 15 20 40 Indef 12
34 5 6
0
10
20
30
40
50
60
70
80
70-80
60-70
50-60
40-50
30-40
20-30
10-20
0-10
The Danish quota value, % of producer price
Depreciation time, yearsReal interest rate, pct.
Value of Danish Quota,
% of producer price
Fødevareøkonomisk Institut
2 4 6 7 8 10 15 20 40 Indef 12
34 5 6
0
10
20
30
40
50
60
70
80
70-80
60-70
50-60
40-50
30-40
20-30
10-20
0-10
Value of Danish Quota,
% of producer price
Depreciation time, yearsReal interest rate, pct.
Guyomard (2002)Jansson (2002) Jensen og Frandsen (2003)
The Danish quota value, % of producer price
Fødevareøkonomisk Institut
Different estimates
1. Guyomard et al. (2002):
• Use EC Farm Accountancy Data Network (FADN) to estimate marg.
costs but not entirely clear how. Quota rents: 15-49%. DK: 42%
2. Jansson (2002): Depreciation time: 8 years, real interest rate: 6%
== > quota rent = 22% of milk price
3. Jensen & Frandsen (2003): Depreciation: infinite, real interest: 4%
== > quota rent = 5% of milk price
Depreciation time reflects farmers’ expectations
• High quota rents: No compensation for policy changes
• Low quota rents: Compensation for future policy change
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Substantial EU-15 differences ...
Fødevareøkonomisk Institut
Quota rents, EU-15, 2001
0
2
4
6
8
10
12
14
16
18
Neth
erlands
Germ
any
Belg
ium
/Lux.
Fra
nce
Unite
d K
ingdom
Austr
ia
Irela
nd
Port
ugal
Spain
Denm
ark
Italy
Gre
ece
Sw
eden
Fin
land
Source: Jensen & Frandsen (2003)
% o
f pro
duce
r pri
ce
Fødevareøkonomisk Institut
Milk quota rents in the EU15: Two different sets of estimates
05
101520253035404550
Nethe
rland
s
Germ
any
Belgium
/Lux
.
Franc
e
United
Kin
gdom
Austri
a
Irelan
d
Portu
gal
Spain
Denm
ark
Italy
Greec
e
Sweden
Finlan
d
EU-15
% o
f p
rod
uc
er
pri
ce
Jensen and Frandsen Guyomard et al.
Fødevareøkonomisk Institut
Illustrative simulations
• To illustrate the impact of using different initial quota rents
when analysing EU dairy policy reform using CGE models
• To stress the importance of recognising EU heterogeneity
• Starting point is standard GTAP model and database (v 6.2)
• Four different adjusted databases
o “Small” (Jensen and Frandsen) and “large” (Guyomard) quota rents
o EU-15 as a single region and EU-15 disaggregated
• Simulation eliminates EU dairy export subsidies
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Abolishment of dairy export subsidies – Selected results (% change) Small Quota Rents Large Quota Rents
Exports to third countries
Exports to third
countries
B_L -99.4 -98.9 DNK -99.6 -98.9 DEU -99.4 -99.0 GRC -99.7 -99.2 ESP -99.6 -99.1 FRA -99.5 -99.2 IRL -99.5 -99.0 ITA -99.6 -99.2 NLD -99.0 -98.6 AUT -99.6 -99.3 PRT -99.7 -99.5 FIN -99.6 -99.1 SWE -99.6 -99.4 GBR -99.7 -99.5 EU15 -99.5 -98.9
Fødevareøkonomisk Institut
Abolishment of dairy export subsidies – Selected results (% change) Small Quota Rents Large Quota Rents
Exports to third countries
Production Exports to third
countries
Production
B_L -99.4 -7.4 -98.9 -0.2 DNK -99.6 -26.3 -98.9 -9.6 DEU -99.4 -1.7 -99.0 0 GRC -99.7 -7.2 -99.2 0 ESP -99.6 -5.1 -99.1 0 FRA -99.5 -5.6 -99.2 -0.3 IRL -99.5 -9.3 -99.0 0 ITA -99.6 -5.6 -99.2 0 NLD -99.0 9.9 -98.6 0 AUT -99.6 -1.7 -99.3 0 PRT -99.7 -1.5 -99.5 0 FIN -99.6 -10.5 -99.1 -6.1 SWE -99.6 -5.6 -99.4 -6.3 GBR -99.7 -0.8 -99.5 0 EU15 -99.5 -3.6 -98.9 -0.7
Fødevareøkonomisk Institut
Abolishment of dairy export subsidies – Selected results (% change) Small Quota Rents Large Quota Rents
Exports to third countries
Production Internal EU
exports
Exports to third
countries
Production Internal EU
exports B_L -99.4 -7.4 2.8 -98.9 -0.2 7.8 DNK -99.6 -26.3 -10.6 -98.9 -9.6 33.8 DEU -99.4 -1.7 4.4 -99.0 0 -1.6 GRC -99.7 -7.2 -24.3 -99.2 0 1.6 ESP -99.6 -5.1 -17.3 -99.1 0 -0.2 FRA -99.5 -5.6 -12.7 -99.2 -0.3 -14.8 IRL -99.5 -9.3 5.7 -99.0 0 27.9 ITA -99.6 -5.6 -19.7 -99.2 0 7.5 NLD -99.0 9.9 73.9 -98.6 0 47.2 AUT -99.6 -1.7 -10.3 -99.3 0 -21.5 PRT -99.7 -1.5 -22.4 -99.5 0 -42.6 FIN -99.6 -10.5 -25.8 -99.1 -6.1 4.9 SWE -99.6 -5.6 -28.0 -99.4 -6.3 -41.2 GBR -99.7 -0.8 -22.1 -99.5 0 -36.2 EU15 -99.5 -3.6 -0.2 -98.9 -0.7 -1.7
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Effects on third countries
Exports increase substantially
• USA: 20-24%
• Canada: 27-19%
• Australia: 22-25%
• New Zealand: 11-12%
Using large or small initial quota rents -> differences in results between 0.5 and 1 %-points
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Changes in welfare (Equivalent Variation) due to abolishment of EU dairy export subsidies, mill. USD
Quota rents Small Large B_L 84 67 DNK 184 133 DEU 257 197 GRC 26 44 ESP 84 79 FRA 419 280 IRL 64 13 ITA 250 312 NLD 354 217 AUT 22 19 PRT 15 19 FIN 73 63 SWE 24 24 GBR 46 78 Total 1900 1543 Agg. EU15 1951 1498
Fødevareøkonomisk Institut
Changes in welfare (Equivalent Variation) due to abolishment of EU dairy export subsidies, mill. USD
Quota rents Quota Rents Small Large Small Large B_L 84 67 CEEC -55 -60 DNK 184 133 AUS 20 18 DEU 257 197 NZL 67 52 GRC 26 44 JPN -185 -175 ESP 84 79 CHN -38 -32 FRA 419 280 IND -4 -6 IRL 64 13 ROA -86 -80 ITA 250 312 CAN -89 -88 NLD 354 217 USA -122 -120 AUT 22 19 LAM -83 -91 PRT 15 19 AFR -164 -160 FIN 73 63 ROW -425 -399 SWE 24 24 Total -1165 -1141 GBR 46 78 Total 1900 1543 Agg. EU15 1951 1498
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Preliminary findings
Initial quota rent estimates/assumptions influence results
• Magnitude of change in production, exports and welfare
• Both at EU aggregate level and for individual countries
• Influence on 3rd country results is less significant
• Ranking of initial quota rents is important for results
• Important to discuss relative competitiveness among EU-15
Fødevareøkonomisk Institut
Future work• National quota rent estimates (reliable marginal cost estimates and/or milk quota prices)
• Relative competitiveness of EU15 (primary and processing)
=> Survey initiated among agri-economic researchers in the EU
• Disaggregate GTAP dairy sector into categories such as butter, cheese, SMP, WMP, and other dairy products
=> Possibilities of collaboration with Trinity College, Dublin
• Integration of full set of dairy policy instruments in models
• Include rest of CAP in model, incl. EU budget and interregional transfers, accession of new member states, etc.
• Baseline / update databases (dairy sector competitiveness depends on changes in factor markets, technology, policy, etc.)