Applied welfare analysis of reform options for the sugar CMO with CAPSIM

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Applied welfare analysis of reform options for
the sugar CMO with CAPSIM
Peter Witzke, Bonn, May 2003
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• Modelling Family at Bonn
• CAPSIMCommon Agricultural Policy Simulation
  System
• WATSIM
• World Agricultural Trade Simulation Modelling
  System
• CAPRI
• Common Agricultural Policy Regional Impact
  Analysis

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CAPSIM - Key features

• Complete coverage of ag markets and EAA
  (Economic Accounts on Agriculture)

• Member states link to nonspatial EU market

• Cleared (so far) with fixed trade volumes or
  fixed trade prices

• Comparative static

• Rather detailed policy coverage

• Behavioural functions derived from microeconomics

• Calibrated parameters

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CAPSIM - Policy implementation

• Border measures tariffs flexible
  levies/export subsidies

• WTO constraints gt intervention

• Milk quota gt shadow revenues

• Sugar A, B quotas gt incentive revenue approach

• Set aside exogenous or linked to obligatory
  set aside rate

• Premiums with national envelopes

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Supply side (1)
Behavioral function for activity levels and
inputs netputs NETPm,s ( derived from
Generalised Leontief profit function)
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Supply side (2)

• Revenues are net of land/energy/protein costs

NREVm,j REVm,j - lm,jPLNDm - hm,jPENEm -
rm,jPPRTm lm,j, hm,j, rm,j are
land/energy/protein requirements (? 0)
Trick to incorporate balances on
land/energy/protein in CAPSIM
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Supply side (3)
Note Determination of PREM (total) premia is
rather complicated For exogenous activities
(and dairy) shadow revenues NREV are calculated
endogenously (independent from REV)
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Supply side (4)

• Milk quotas kinked behavioural functions,
  shadow revenue REVS lt actual
  revenue REV

Shift in supply function is ignored currently
(data problems)
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Supply side (5)

• Sugar beet steered over incentive revenue

NREVm,SUGB F(NREVm,SUBA ,NREVm,SUBB ,
NREVm,SUBC , QTm,SUGB ) Parameters of F(.)
approximate sugar version of CAPRIgt max
expected profit (3 states of nature)gt quota
endowment responsive to sugar beet
production Pure profit maximisation abandoned
for sugar beet
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Supply side (6)
For producer welfare we use, rather than p(RNms)
- p(RNmr), s simulation, r reference
D(Agricultural income) NVAF from EAA definition

• Here easier because
• complete EAA is covered anyway
• no need to watch for exogenous items with
  endogenous prices (grass)

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Demand (1)
Us from indirect utility function ( max U, given
p,Y) Y e(p,U) f - g / U ? Y- f - g / U?
y(p,y) U - g /(y- f)
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Demand (2)
Function g Generalised Leontief g(p) Si Sj
Bij pi.5 pj.5
Function f Linear f(p) Si Di pi
Marshallian demand from indirect utility
function U y(p,e(p,U)) gt ?U/?pk 0
?y/?pk ?y/?y ? ?e/?pk ? ?e/?pk qk - ?y/?pk
/ ?y/?y (Roys identity)
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Other stakeholders
Budget impacts Calculated from sum of premiums
and export subsidies, all else assumed equal
Sugar processing industry impacts Calculated
from sum of revenues net of beet costs, levies
and processing cost
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Sugar project methodology
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Sugar project reference runPreliminary February
results, see Agrafacts 26-03
Medium reference Reduced subsidised exports
and Medium imports from LLDCs (EBA agreement,
2.6 mio t) and Balkans (0.6 mio t)
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Sugar project liberalisation impacts
(1) (Preliminary February results, see Agrafacts
26-03)
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Sugar project liberalisation impacts
(2) (Preliminary February results, see Agrafacts
26-03)

• Note
• Agricultural losses higher in relative terms on
  (well off) sugar beet farms
• Sugar industry strongly affected in due to
  narrow definition of industry
• Separation final consumers lt-gt food industry was
  impossible
• EU budget gains are mainly at expense of ACP
  countries

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Sugar project liberalisation impacts (3)
Preliminary February results, see Agrafacts 26-03
(Welfare relevant only if market wages ? shadow
wages)