Exploring the potential for a payment-by-results approach in EU agri-environmental measures *Gerald Schwarz, **Andrew Moxey, ***Davy McCracken, ****Sally Huband and ****Roger Cummins

1
The Economics of Alternative Energy Sources and
Globalization The Road Ahead, November15 17,
2009, Orlando, Florida, US
Impacts of future energy price and biofuel
production scenarios on international crop
prices, production and trade
Gerald SchwarzHarald von WitzkeSteffen
Noleppa
Humboldt University Berlin, Department for
Agricultural Economics and Social Sciences,
Chair of International Agricultural Trade and
Developmentagripol network for policy
advice GbR
2
Outline

• Background
• Objectives
• Review of determinants of world market
  pricesEnergy price and biofuel production
• Modelling framework
• World market price changes
• Impacts on crop production and trade
• Conclusions

3
Background

• Trend of increasing agricultural commodity prices
• Reversal of the trend of declining agricultural
  commodity prices
• Many studies on the different factors
  contributing to the increase in food prices
  emphasise
• Critical role of levels of energy prices and
  biofuel production for future agricultural market
  prices
• Increase in real international food and
  agricultural commodity prices in the decades to
  come
• To what extent will future levels of energy
  prices and biofuel production contribute to
  higher prices and affect markets?

4
Objectives

• Main aim is to analyse the impacts of different
  scenarios of increasing energy costs and biofuel
  production on international agricultural market
  prices and production in key trade regions.
• To review the reasons for higher prices in the
  next few decades than in the past, with an
  emphasis on the roles of the price of energy and
  the extent of biofuel production
• To quantify the impacts of the determinants of
  world market prices of selected agricultural
  commodities for 2016/18 and the potential impacts
  on supply and trade quantities in main
  agricultural regions
• At this stage focus on key crop markets

5
Determinants of world market prices (1/4)

• Demand determinants
• Continuation of population growth (higher food
  demand for grains)
• Increase in per capita income in developing and
  newly industrializing countries leads to higher
  consumption of dairy, meat, and processed foods
• Growing consumption of animal products in
  developing countries also suggests increase in
  animal feed demand for crops
• Expected increase in world demand for key crop
  commodities

Commodity 2006 (million tonnes) 2018 (million tonnes) Increase (percent)
Wheat 744 885 19
Corn 837 1046 25
Soybean 279 352 21
Rapeseed 51 69 40
Sunflowers 32 41 24
Source Own calculations based on FAPRI (2009)
6
Determinants of world market prices (2/4)

• Supply determinants
• Land reserves for food production limited
• The best and most productive land already is
  being farmed
• Existing land reserves should not be farmed for
  environmental reasons (e.g. rain forest)
• Required growth in productivity difficult to
  achieve
• Productive potential of existing methods
  increasingly captured
• Lack of agricultural research investment
• Water is becoming ever scarcer and more expensive
• Expected growth of food supply will be smaller
  than the rise in demand
• However, so far the discussion ignores the impact
  of rising energy prices

7
Determinants of world market prices (3/4)

• Energy prices
• Agricultural production is rather energy
  intensive
• Close relationship between agricultural commodity
  and energy prices

• Higher energy prices lead to higher cost of
  production and thus reduced supply
• Food prices will increase with higher energy
  prices
• Different projections of future level of oil
  price
• EC (2008) US 102 per barrel in 2017
• OECD (2009) US 70 in 2018

Source CRB (2009)
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Determinants of world market prices (4/4)

• Energy prices and biofuel production
• Higher energy prices are an incentive for
  increased biofuel production
• Increased biofuel production on land suitable for
  food production reduces the availability of food
• But only a small share of produced bioenergy is
  liquid fuel based on grains, sugar cane, oilseeds
  and other crops

• In summary
• Demand growth gt supply growth gt higher
  agricultural commodity prices
• Specific role of energy prices and biofuel
  production for food prices
• Impacts of different energy price scenarios?
• Impacts of different biofuel production
  scenarios?

9
Modelling framework (1/2)

• Model structure
• Multi-market, multi-region partial equilibrium
  model
• Static net trade model based on VORSIM/SWOPSIM
  modelling framework
• Cobb-Douglas supply and demand function with
  separate representation of food and feed demand
  functions and bioenergy demand (exogenous)
• Elasticities are based on SWOPSIM and the FAPRI
  elasticity database and calibrated for
  homogeneity and symmetry
• Multiplicative shift factors in supply and demand
  functions capturing regional differences and
  differences between food, feed and bioenergy
  demand shifts
• Currently coverage of 10 regions including US,
  Canada, EU, Germany, France, Brazil, Australia,
  China, CIS, and RoW
• Work in progress - model extensions on-going

10
Modelling framework (2/2)

• Scenarios and shift factors
• Base period 2004 2008
• Scenario 2016/18 Matrix of implemented shift
  factors (example EU, in percent)

Shifts Supply Supply Supply Demand Demand Demand
Commodity Area Productivity Energy cost Population growth Feed demand Bioenergy
Wheat -3 9 -7 8 11 380
Corn -3 8 -8 24 10 250
Other grains -3 8 -5 24 11 300
Oilseeds -3 24 -6 16 11 220
Sugar -3 5 -9 -1 -1 1200
Source Own calculations based on OECD and FAO
(2008)

• Alternative scenarios
• With higher energy cost shift factor
• Without energy cost shift factor
• Without bioenergy demand shift factor

11
World market price changes (1/4)

• World market price projections for 2016/18 new
  base scenario for 2016/18 all shift factors
  included
• Prices increase between 35 80 percent

Market Prices in base period (US/mt) 2016/18 (US/mt)base scenario Change (in percent) Peak prices in 2007/2008 (US/mt)
Wheat 225 304 35 340
Corn 152 274 80 218
Oilseeds 374 546 46 583
Other grains 127 185 46 190
Sugar 283 415 47 301
Source Own calculations
12
World market price changes (2/4)

• World market price projections for 2016/18
  scenario with higher energy price (as project in
  OECD outlook 2008)
• Higher energy prices lead to significantly higher
  price increases, e.g. 91 instead of 35 percent
  for wheat

Market Prices in base period (US/mt) 2016/18 base scenario (in percent) 2016/18 with high energy price (in percent)
Wheat 225 35 91
Corn 152 80 163
Oilseeds 374 46 97
Other grain 127 46 85
Sugar 283 47 98
Source Own calculations
13
World market price changes (3/4)
World market price projections for 2016/18
scenario with constant energy price (no energy
cost shift)
Market Prices in base period (US/mt) 2016/18 base scenario (in percent) 2016/18 with high energy price (in percent) 2016/18 withbase period energy price (in percent)
Wheat 225 35 91 16
Corn 152 80 163 52
Oilseeds 374 46 97 28
Other grain 127 46 85 31
Sugar 283 47 98 27
Source Own calculations

• World market price changes are significantly
  smaller
• Large variability in price effect depending on
  energy price development, in particular on wheat
  and corn markets

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World market price changes (4/4)
World market price projections for 2016/18
scenario with constant biofuel production (no
bioenergy demand shift)
Market Prices in base period (US/mt) 2016/18 base scenario (in percent) 2016/18 with high energy price (in percent) 2016/18 withbase period energy price (in percent) 2016/18 withbase period biofuel production (in percent)
Wheat 225 35 91 16 27
Corn 152 80 163 52 40
Oilseeds 374 46 97 28 32
Other grain 127 46 85 31 32
Sugar 283 47 98 27 28
Source Own calculations

• Reduction of price effects, but to a smaller
  extent than under a constant energy price
  except on the corn market
• Energy price major determinant of future price
  development

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Impacts on crop production (1/3)

• EU change in crop production (in percent)

Market 2016/18 base scenario 2016/18 with high energy price 2016/18 withbase period energy price 2016/18 withbase period biofuel production
Wheat 4.19 -3,16 7.70 4.22
Corn 24.29 17,00 27.31 9.07
Oilseeds 43.41 40,82 43.23 35.35
Other grains 12.83 6,49 13.82 10.31
Sugar -2.39 -16,61 5.34 -4.06
Source Own calculations

• Despite the increase in energy cost in the
  2016/18 base scenario, crop production increases
  (except sugar)
• Higher energy cost lead to a decline in the
  supply of wheat and sugar
• The import role of the energy price is particular
  evident on the EU sugar market
• The importance of biofuels is reflected in
  changes in corn (and oilseeds) production
  reflecting the large drop in price compared to
  the 2016/18 base scenario

Source Own calculations
16
Impacts on crop production (2/3)

• US change in crop production (in percent)

Market 2016/18 base scenario 2016/18 with high energy price 2016/18 withbase period energy price 2016/18 withbase period biofuel production
Wheat 0.65 -7,71 4.57 4.25
Corn 29.96 22,51 33.95 17.14
Oilseeds 25.47 23,70 26.53 22.53
Other grains 18.02 14,44 20.07 20.31
Sugar 30.35 21,98 33.50 22.23

• Despite the increase energy cost in the 2016/18
  base scenario, crop production increases (in
  particular sugar, corn and oilseeds)
• Higher energy prices lead to smaller increases
  and a decline in wheat supply
• Corn, wheat and sugar production particular
  affected by variations in the energy price
• The importance of biofuels is reflected in
  changes in corn and sugar production
• Shift of production towards wheat and other
  grains (from energy to food)

Source Own calculations
17
Impacts on crop production (3/3)

• Brazil change in crop production (in percent)

Market 2016/18 base scenario 2016/18 with high energy price 2016/18 withbase period energy price 2016/18 withbase period biofuel production
Wheat 7.17 -0,66 11.24 7.27
Corn 38.62 35,08 40.83 23.93
Oilseeds 28.63 24,36 30.55 24.62
Other grains 6.92 -5,27 13.12 9.68
Sugar 32.40 29,04 33.32 23.74
Source Own calculations

• Highest relative increase in corn and sugar
  production of all covered regions
• The impact of changes in the energy price is
  particular high for wheat and other grains
  (markets without substantial bioenergy demand)
• The importance of biofuels is reflected in
  changes in corn and sugar production
• Overall, projected world production increases of
  10 30 percent within the range of OECD
  projections

Source Own calculations
18
Impacts on net trade (1/2)

• Net trade effects on the corn market

Source Own calculations

• High market price with higher energy prices
  improve net trade of EU corn
• The US corn market becomes an importing market
  under all three scenarios assuming an increase in
  biofuel production small changes depending on
  energy price
• Higher energy cost have a small positive effect
  on net trade of Brazilian corn

19
Impacts on net trade (2/2)
Net trade effects on the oilseeds market
Source Own calculations

• Biofuels main factor affecting net trade in
  Germany, less important at EU level
• Net trade in the US benefits from higher market
  prices and higher food and feed demand on the
  Chinese oilseeds market

20
Conclusions (1/2)

• In summary
• Results suggest that price of major agricultural
  crops will increase between 35 and 80 percent
  until 2016/18
• Price of energy will be the single most important
  determinant of the price of food in the decades
  to come
• Total production increases vary between 10
  percent for wheat and 30 percent for oilseeds
• Variations in energy cost have the biggest impact
  on sugar production in the EU and China, corn
  production in the North America and CIS, other
  grains production in Australia and Brazil,
• Increasing bioenergy demand has generally the
  biggest impact on corn production followed by
  sugar and oilseeds
• Trade impacts are mixed for the EU and US
  Positive trade impacts for oilseeds, other grains
  and sugar markets in both regions and EU corn
• Biofuel production is the main determinant for
  changes in net trade on the US corn, German
  oilseeds and Brazilian sugar market

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Conclusions (2/2)

• Results highlight need for productivity growth
• Large projected production increases only
  possible through higher productivity growth, as
  land reserves are limited
• Large increases in oilseeds and corn production
  in the EU depend on the availability of
  additional land. Increasing competition with
  non-agricultural land uses such as nature
  conservation and housing likely to reduce
  available land.
• Even higher pressure on food production in
  developing countries
• But...
• Assumptions on energy costs and oil price
  fluctuations
• Assumptions of future biofuel production and
  dependency on policy developments
• Impact of elasticities