EU dairy policy analysis: Exploring the importance of quota rent estimates

Fødevareøkonomisk Institut

EU dairy policy analysis:

Exploring the importance of

quota rent estimates

By

Research Fellow

Chantal Pohl Nielsen


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


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


(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


(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?


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


The Danish case…


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


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


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


Substantial EU-15 differences ...


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


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.


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


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




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




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


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


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


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


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


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.)

EU dairy policy analysis: Exploring the importance of quota rent estimates

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