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Decomposition technique for estimating individual policy impact

The future of the agricultural sector in the European Union now seems set in a very different context than when originally investigated in the first Scenar 2020 study. Two major items are the increased volatility in agricultural commodity markets and the effect of mandated blending of biofuels. But in other respects the situation has not evolved much since a few years ago: an ageing farm population within the European Union, an important wage differential between the agricultural and other economic sectors, the increasing productivity that is coming from investment in human and physical capital, and the role of land as a buffer among the factors of production. The interplay between all of these items is the reason for introducing a decomposition technique for estimating individual policy impact upon the agricultural sector.

The following figures present the results of the decomposition of the trade growth for crops (wheat, other grains, oilseeds, sugar, horticulture, other crops) livestock (primary and processed cattle, pork and poultry products) and agri-food products. Agri-food products present the total of primary and processed agricultural and food commodities, including crop and livestock products. (Table 7.3)

Table 7.3. Composition of LEITAP categories: crops, livestock, agri-food

Crops

Livestock

Agri-food

Paddy rice; wheat; cereals grains n.e.c.; oilseeds; sugar cane; sugar beet; vegetables; fruit; nuts; plant-based fibres; crop n.e.c.

Raw milk; cattle; sheep; goats; horses*; animal products n.e.c.; wool*; meat products of cattle, sheep, goats, horses; meat products n.e.c.

Paddy rice; wheat; cereals grains n.e.c.; oilseeds; sugar cane; sugar beet; vegetables; fruit; nuts; plant-based fibres; crop n.e.c.; raw milk; cattle; sheep; goats; horses*; animal products n.e.c.; wool*; meat products of cattle, sheep, goats, horses*; meat products n.e.c.; dairy products; vegetable oils and fats; sugar; processed rice; food products n.e.c.; beverages and tobacco products

* Commodities in LEITAP but not in ESIM. n.e.c.: Not Elsewhere Classified. Source: GTAP classification.

To identify the separate impact of individual CAP, trade and biofuel policies on the scenario outcomes the total scenario impact has been decomposed into the following effects:5

  • Total effect: Scenario outcome, includes all policy and other effects of the following sub-items.
  • Border effect: Isolates the impact of changes in trade polices measures on the import and export side. In the Reference and Conservative CAP scenario this is mainly the impact of the Falconer WTO proposal (including abolition of all export subsidies) and the bilateral trade agreements. In the Liberalisation scenario this is the total abolition of all export subsidies and import tariffs.
  • RenEnDir: Identifies the impact of the introduction of the mandatory blending requirements of the EU Renewable Energy Directive.
  • Direct payments: Identifies the impact of changes in direct payments (Pillar 1). It is the change in direct payments implemented under the Health Check reform and the scenario-specific assumptions up to 2020. The cuts in direct payments are 30%, 15% and 100% in respectively the Reference, Conservative CAP and Liberalisation scenarios.
  • Rural development: Identifies the consequences of the transfer of additional funds to all Pillar 2 measures under different scenarios. The increase in EAFRD payments are 105%, 45% and 100% in respectively the Reference, Conservative CAP and Liberalisation scenarios. The budgets are distributed across RD measures according to the current distribution in the RD plans.
  • Other effects: Impact of change in population, production factor supply and productivity. It is calculated as a separate scenario run. It is also mathematically equivalent to the difference between the total effect and the policy effects above, considered individually.

Figures 7.1 and 7.2 depict import and export growth in agri-food trade in the EU27. Export growth of the European Union in the Reference scenario is limited and mainly positive due to other effects (GDP and population growth) that lead to higher consumption in the world (Figure 7.1). The other effects are higher for processed than for crops and livestock commodities as in general these products are demanded more as income grows (higher income elasticity of demand). The impact of the Falconer proposal is reflected in the impact of the border effect. The impact is negative for livestock and agri-food products. The latter is surprising as the EU27 gets enhanced access to other markets due to lower import barriers. However, this negative impact is mainly caused by the abolition of export subsidies, especially in the dairy sector. The impact of rural development spending is slightly positive on agri-food exports as especially human and physical capital investments improve productivity and therefore competiveness. The impact of the Renewable Energy Directive is negative as more biomass products are needed for domestic demand. Another factor is that the increased crop production inside the European Union due to the Directive leads to higher production factor and therefore product prices inside the EU27 relative to the prices in other countries. The impact of reducing direct payments is very small, indicating that direct payments are fairly decoupled. In the Liberalisation scenario (Figure 7.1) exports increase by 20% instead of 5% in the Reference scenario. The difference is mainly caused by increased liberalisation (border effect) and therefore increased access of the EU27 to third markets. This impact is visible for crops, livestock and the whole agri-food sector. In particular, EU27 exports of processed food products increase due to increased market access in the Liberalisation scenario.

Figure 7.1. Decomposition of the change in exports between 2007 and 2020 in agri-food trade eU27

Reference and liberalisation scenario, in billion USD

Source: LEITAP results.

In the reference scenario import growth of agri-food products in the EU27 is substantial and driven by liberalisation (Falconer proposal), other effects and by the EU Renewable Energy Directive. The impact of the other effects is higher for processed products than for crops and livestock as income growth leads to relatively higher demand for processed products than crops and livestock products. The Renewable Energy Directive leads especially to import growth of crops and therefore also agri-food products. The impact of the border effect is not so high for crops and livestock (in particular) in the Reference scenario, as it is assumed that most protected commodities are assumed to be treated as a sensitive product in the Falconer proposal, with the result that reduction in import tariffs is limited. In case of liberalisation (Figure 7.2), imports increase in particular due the impact of modifying the border effect. This effect is very high for livestock and processed commodities, which are not treated as sensitive anymore as the relatively high level of protection is abolished.

Figure 7.2. Decomposition of the change in imports between 2007 and 2020 in agri-food trade EU27

Reference and liberalisation scenario, in billion USD

Source: LEITAP results.

 
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