Impact of the CAP Reforms on U.S. – EU Cereal Trade

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

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 (131.11 ECU/TON) TARIFF EQUIVALENT (1995 - 140 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

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