Economic Modelling as a First Step in

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• Economic Modelling as a First Step in
• Environmental Evaluation of the CAP
• Presentation to EEAC WG Agriculture Seminar
• 29th June 2007

Dr Joan Moss Agri-Food Biosciences Institute
Queens University Belfast
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Economists model at the sectoral (macro) and
individual farm (micro) levels How can
econometric models of agricultural sectors and
programming models of representative farms
provide useful information for the environmental
evaluation of the Common Agricultural Policy?
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Contents

• Sectoral economic modelling in the FAPRI-UK
  project

• Examples of CAP Reform policy scenarios analysed
  and price and production results generated

• Representative bio-economic Farm Models and
  example of farm-level results

• Results from economic modelling feeding through
  to environmental evaluation

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Sectoral Economic Modelling Methodology
FAPRI-UK Projects four country models

• Four sets of econometrically estimated demand and
  supply models for the main agricultural sectors
  of England, Wales, Scotland and Northern Ireland

• These models comprise the UK component of the
  GOLD (EU) model operated by FAPRI Missouri and
  are solved simultaneously with EU models

• The GOLD model is linked to the FAPRI Global
  modelling system

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Sectoral Economic Modelling Methodology
FAPRI-UK models structure and function

• Models capture linkages between main agricultural
  sectors in England, Wales, Scotland N Ireland

• UK agricultural sectors linked to European and
  Global markets

• Models simulate all the key physical and
  financial relationships

• Variables which capture key policy measures also
  included

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Sectoral Economic Modelling Methodology
FAPRI Global Model
FAPRI EU Gold Model
UK Models (E, W, S, NI)
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Sectoral Economic Modelling Methodology

• Commodity Coverage
• Cereals (wheat, barley, oats rapeseed)
• Beef
• Sheep
• Dairy (liquid milk, butter, cheese, SMP WMP)
• Poultry
• Pigs

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Sectoral Economic Modelling Methodology

• Models are updated on an annual basis

• New (latest) data are added
• Equations are re-estimated
• Model structure updated/altered to account for
  new policy market changes
• Validation and calibration procedures critical

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Sectoral Economic Modelling Methodology
Approach to Policy Analysis

• Models generate 10 year
• Baseline projection - assuming current policies
  remain unchanged
• Policy scenario projections - set of policy
  assumptions pertaining over 10 years
• Comparison made between each Scenario and
  Baseline projections

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Sectoral Economic Modelling Methodology
Policy Scenarios project changes in

• agricultural prices
• agricultural production levels
• stock numbers, acreage and yields
• agricultural incomes

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Sectoral Economic Modelling Methodology
It is important to note that the models generate
projections not forecasts
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Examples of FAPRI-UK CAP Scenarios Analysed

• Impact of Fischler CAP Reform on the UK beef
  sector compared with continuation of Agenda 2000
  policy regime

2. Abolition of EU milk quota with existing
International Trade Rules full Export Subsidy
elimination
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1. Analysis of the impact of the Fischler CAP
Reforms on the UK beef sector
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Impact of Fischler Reforms
UK Beef Cows
Fischler Reform 17 lower than Agenda 2000 in
2014
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• Projection of GHG emissions from agriculture

• Example of how results from sectoral modelling
  can be used to assess an environmental impact
• Projections of CAP Reforms impact on production
  in livestock sectors can be used to to quantify
  GHG emissions.
• Estimated livestock numbers combined with
  fertilizer usage can be applied to an Emissions
  model (FAPRI-Ireland) to estimate Mt CO2
  equivalents

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Emissions model
Animal numbers
Animal numbers
Emission levels (Mt CO2 equivalents)
Emission factors
Fertilizer application
Fertilizer application
IPCC guidelines
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2. Analysis of impact of abolition of EU milk
quotas
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Abolition of EU Milk Quotas
UK Milk Price
Scenario 11 lower than Baseline in 2016
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Identification of Optimal Production Systems
Price projections from econometric sectoral
models of CAP reforms can be applied to
Bio-Economic Representative Farm Models to
identify optimal (profit maximising) production
systems at farm level
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Bio-Economic Representative Farm Model Methodology

• Bio-Economic Representative Farm Models adopt a
  Whole Farm Business approach by
• simulating a range of production systems
• accounting for all key farm resources
• incorporating physical, biological and policy, as
  well as economic, relationships

The models are optimised to identify the most
profitable production options and the financial
penalties associated with sub-optimal solutions
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Identification of Optimal Production Systems
Analysis by Anderson indicated that for producer
milk prices from 16 - 21 pence/litre the optimal
production systems were

• Autumn calving - 8,000 l/cow 2.0 t ration of
  concentrates grass silage/cow
• Spring calving - 7,000 l/cow 1.4 t ration of
  concentrates grass silage/cow

(As milk prices declined over the above range it
had been assumed that a low-input dairy system
rather than a moderate input-moderate output
system would be optimal)
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Identification of Optimal Production Systems
Bio-Economic Representative Farm Models can also
identify the following information of use in
environmental evaluation of agricultural and
environmental policies

• Volumes of slurry produced
• Timing of farming activities e.g. pasture
  management
• Changes in agri-environmental regulations e.g.
  NVZ
• Impacts of land management on biodiversity

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Conclusions

• Markets are continuously changing

• Macro micro economic models must be
  re-estimated, validated and calibrated regularly,
  preferably annually

• Sectoral (macro) models can provide projections
  of production and prices

• The environmental consequences of aggregate
  levels of output e.g. emissions from grazing
  livestock, can be estimated from sectoral model
  results

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Conclusions

• Bio-economic representative farm (micro) models
  can identify profit maximising production systems
  for given prices, changes in agricultural policy,
  environmental policy and other constraints

• The resultant production systems in turn can
  provide input to detailed environmental impact
  assessments