Transcript Outlook for World and EU Agriculture

The FAPRI-Ireland Partnership
Developing the Outlook for Irish Agriculture
Trevor Donnellan
Thia Hennessy
Rural 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
FAPRI
World Model
FAPRI
EU 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
Commodity
Models
Farm Level Modelling
–
–
–
Linear Programming
incorporating results of commodity models
representative farms selected and modelled
Farm
Models
Agricultural Output: Ireland 1999
1600
Euro (000)
1400
1200
1000
800
600
400
200
0
Cattle
Pigs
Sheep
Milk
Crops
Other
Commodity Models
Trevor Donnellan
Commodity Model Inter Linkages
Sheep Output Values
Beef Output Values
Milk Output Values
Pig Output Values
Dairy
Dairy Cow
Numbers
Dairy Cow
Numbers
Beef
Dairy Meal
Price
Cereals
Cereal Prices, Production,
Value & Hectares
Dairy Cow
Numbers
Cattle Feed Price
Cattle Numbers
Poultry Prices
Poultry Numbers
Inputs
Pig Meal Price
Sheep
Cattle Feed
Price
Poultry Output Values
Pigs
Poultry
Meal
Prices
Poultry
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 Economic
Projections
- WEFA, Link, DRI
Model
Analysis
Policy
Assumptions
Final Analysis
Or
Baseline
Expert Review
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
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 Elimination
Revenue of Irish Milk sector
29
1,400
27
25
1,200
(£ 000) million
Euro per 100kg
Irish Farm Milk Price 3.7% fat
23
21
19
17
1,000
800
600
400
200
15
1995 1997 1999 2001 2003 2005 2007 2009
Baseline
Elimination
Under export subsidy elimination the
2010 price down 20% on 2010 baseline
0
2000
2002
2004
2006
2008
2010
Value of Milk Sold Direct Compensation
2010 Value Down 20% on 2000
2010 Revenue down 13% on 2000
Beef : Export Subsidy Elimination
Irish Cattle Price
Revenue of Irish Cattle
100
(£ 000) million
IR£ Per 100kg
120
80
60
40
20
1995 1997 1999 2001 2003 2005 2007 2009
Baseline
Elimination
Under export subsidy elimination down
20% on 2010 baseline
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
2000
2002
2004
Value of Cattle Sold
2006
2008
2010
Direct Compensation
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
Static
10800
45
95 400
0
Developer
7900
41
103 700
55%
123
425 700
5%
44
169 000
10%
Large
1000
Typical
13200
Quota
Change
1992-1996
Representative Cattle Farms
Descriptor
1996
Area
Hectares
Family
Farm
Income
Area
Change
1992-1996
No Off- Farm Employment
Large
4700
Moderate
28300
74
£18 250
8%
33
£5 071
2%
Off- Farm Employment
Hobby
15000
Efficient
8200
33
£1 900
-10%
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
35000
IR£
30000
25000
20000
15000
10000
1998
2000
No response margin
2002
2004
Response margin
2006
2008
2010
Response cashflow
Results – Typical Dairy Farm

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 – Developer Dairy Farm
25000
IR£
20000
15000
10000
5000
0
1998
2000
2002
No response margin
2004
2006
Response Margin
2008
2010
Cashflow
Results – Developer Dairy Farm

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 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 PAT
provide?

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