Model based economic analysis of Irish agriculture using CSO

data

Kevin Hanrahan and Trevor Donnellan (Teagasc)

4th Business Statistics Seminar (Agriculture) 22 November 2012

Chester Beatty LibraryDublin Castle

Overview

FAPRI-Ireland Model and CSO data Baseline and scenario analysis using the FAPRI-Ireland

Model FAPRI-Ireland Baseline 2012-2021

Agricultural output value and distance to FH2020 targets Operating surplus and subsidy dependence Baseline GHG emissions

Agricultural economics modelling and policy issues for the future Restructuring, Productivity and Factor Markets Agricultural price volatility

Conclusions

Background and Objectives

Dynamic partial equilibrium economic model of the Irish agricultural sector

Linked to FAPRI EU & global modelling systems

Teagasc FAPRI-Ireland farm level microeconomic models

Objective of FAPRI-Ireland model based analysis “… timely and relevant analysis of policy”

Annual Baseline and scenario analyses used in evaluating policy changes over the last 14 years

Traditional focus of analysis is on sector & market level impacts of policy change Increasing emphasis on environmental impacts of agricultural sector

developments

Commodity Market and EAA ModellingAt the firm level we are all familiar with the profit equation

g are decoupled income subsidies

At the sector level we have a similar equation for Operating Surplus (sector profit or income)

The FAPRI-Ireland model seeks to analyse the effect of changes in policy and markets on these aggregates and their sub-components

Prices (Input and output) Output and input volumes (and

associated agricultural activity levels)

Government subsidies

gxwqp

GXwQp

Commodity Market and EAA Modelling

Output Price

Volume

Input Price

Volume

Subsidies

Sectoral Income

p.Q w.X ∏G

FAPRI-Ireland aggregate sector model

Dynamic, structural partial equilibrium model of Irish agriculture

Based on a series of sectoral sub-models and a model of input

demands and expenditure

Generates full economic accounts for the Irish agricultural sector

Irish model nested within larger models of EU and global

agricultural markets

Models estimated using time series data and methods

Model parameters re-estimated on an ongoing basis

Models simulated within a MS Excel environment to a ten year

horizon

Models and Data: FAPRI-Ireland

FAPRI-Ireland Aggregate Sector Model

FAPRI-Ireland FAPRI-Ireland Farm Level ModelFarm Level Model

FAPRI EU model

ESRI Hermes Model

FAPRI World Model NFS

Database

CSO &Eurostat

databases

DAFM, EC, OECD

FAPRI-Ireland aggregate sector model Models for land allocation, dairy, pigs, cattle, sheep, poultry,

cereals, other crops and input use Modelling economic activity levels

Animal numbers, areas harvested, yields Modelling commodity supply and use balances

Production, imports, domestic use, exports and ending stocks Fundamental supply & use identity

Beginning Stock + Production + Imports ≡ Domestic Use + Exports + Ending Stock

Holds for all activities and all commodities at all points in time Modelling price formation

Prices formed at EU level but supply and use in Ireland affect EU prices

Prices adjust until EU net export supply equal EU net export demand

CCSPRIE CalfCrop

CVKTTIE Calf

Slaughter

CSKTTIE Cow

Slaughter

CCKTTIETotalCattle

Slaughter

CCSLWIE Cattle

SlaughterWeight

BCCCTIE Beef Cows

Ending

BCITTIE BeefCowsBeg.

DCCCTIE DairyCows

Ending

DCITTIE DairyCowsBeg.

CCOCAIE OtherCattle

CCSMTIECattle Imports

CCUXTIECattle

Exports

CCKOTIE Other Cattle

Slaughter

CCUDLIECattle Death

Loss

BVITTIE Beg. Beef

Stocks

BVCCTIEEnding Beef

Stocks

BVCCIIEChange

BeefStocks

CCPFHIE Domestic

Price

BVUDCIEDomestic

Use

BVUPCIEPer Cap.Domestic

Use

BVSPRIEBeef

Production

CCPFHE5European

Price

BVUXTE5 Total

EU BeefExports

BVUXNE5 EU Beef

Net-Exports

BVUXTIEBeef

Exports

BVSMTE5Total

EU BeefImports

BVSMTIEBeef

Imports

CCPFHE5EU

Price

Beef Flow Diagram

BCEGMIESuckler Cow Returns

FAPRI-Ireland aggregate sector model

Modelling input demand central to the analysis using the FAPRI-

Ireland model

Provides projections of input demands (X) and input prices (w)

and ultimately input expenditure (w∙X)

Allows us to project the EAA table

Provides links between commodity sub-models and between land

allocation model and livestock models

Effect of output prices & output levels on input demands

Effect of input prices on input use & ultimately supply

Effect of land availability on input use

Data requirements:Or what do the CSO do for us!Output pricesInput pricesActivity levelsInput demandsCommodity S&U balancesEAA elements

CSO European Commission (DG

Agriculture and Rural Development)

Eurostat Department of Agriculture,

Food and the Marine

Macroeconomic variablesAgricultural and trade policy dataTechnical information on input use Technical info on biological constraints

ESRI Department of Agriculture,

Food and the Marine OECD European Commission Teagasc colleagues

Baseline and Scenario Analysis

Annual Baseline analysis Ten year projection of agricultural activity levels,

agricultural commodity supply and uses and EAA assuming policy remains unchanged from current “law”

An Alice in Wonderland world – we know policy will change Counter-factual simulation with which to assess the

impact of a policy change (scenario)

Scenario analyses CAP reforms (A2000, Fischler, CAP Health Check) WTO National Policy Targets (Food Harvest 2020, AgriVision 2015) National Climate Change policy

FAPRI-Ireland Baseline 2012-2021

Current FAPRI-Ireland Baseline just completed Assumes that the CAP as currently structured

continues until 2021 Milk Quotas are abolished in 2015 No change in sugar policy

National policy measures lapse as currently planned Suckler Cow Welfare Scheme & Sheep Grassland Scheme

No agreement in WTO or new bilateral trade deals International agricultural trade continues to be governed by

URAA

National Climate Change Policy No allocation of sectoral GHG emission caps

FAPRI-Ireland Baseline 2012-2021

Output growth post 2015 (Volume) Milk output grows strongly following abolition of quota in 2015 Beef output value increases due to increase in bovine numbers Sheep & pig sector output declining slightly relative to 2011 Cereal sector output value strongly up due to higher prices

Input expenditure grows strongly (Price and Volume) Higher energy, fertiliser and feed prices Higher feed use due to increasing animal numbers and yields per

animal

Sectoral income projected to decline relative to 2011 Small decline in net subsidies due to ending of nationally financed

measures Importance of subsidies in total subsidies continues

FAPRI-Ireland Baseline 2012-2021

Not realistic to expect costless growth in output volume Even increases in productivity such as higher milk output per cow

will require use of additional resources E.g. additional cows required to grow milk output will require use

of additional input volume

More output will require more inputs If growth in prices of inputs outstrips output price growth market

based component of operating surplus will decline

Policy based component of sectoral income will remain important By construction under the baseline policy remain unchanged Maybe nice to imagine policy providing increases in sectoral

income but in current and likely future economic climate this is unlikely

Baseline 2021vs 2011: Goods Output Value at Producer Prices

0

500

1,000

1,500

2,000

2,500

Beef Sheep Pigs Dairy

mill

ion

euro

2011 2021

Baseline 2021: Output vs. FH2020 Targets

0%

10%

20%

30%

40%

50%

60%

Beef Sheep Pigs Dairy*

% c

hang

e vs

200

7-20

09

2021 FH2020 Target

Operating Surplus 2012-2021

0

500

1,000

1,500

2,000

2,500

3,0002001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

mill

ion e

uro

Operating Surplus

Operating Surplus 2012-2021

0

500

1,000

1,500

2,000

2,500

3,0002001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

mill

ion e

uro

Operating Surplus Net Subsidies on Products and Production

2009 Total net subsidies >

Operating Surplus

FAPRI-Ireland Baseline 2012-2021: GHG Emissions from Agriculture

14

15

16

17

18

19

20

21

22

1990 2000 2010 2012 2014 2016 2018 2020

mill

ion

of t

onne

s of

CO

2 E

q.

History Baseline 20% GHG Reduction Target

Modelling and policy issues for the future Volatility

Likely that we will see another year like 2009 in the next 10 years

Deterministic projections if misinterpreted as forecasts will almost certainly will be “wrong” ex post

Research underway with colleagues from FAPRI-MU on developing a stochastic FAPRI-Ireland baseline

Stagnant to declining sectoral income despite growing output value Projected continuing decline in sectoral terms of trade Growth in input prices and expenditure outstripping growth in

output prices and value Growth in Irish agricultural productivity and restructuring of

Irish agriculture required to maintain incomes of those working in agriculture

Modelling and policy issues for the future:The importance of good data

Mitigating the impact of agricultural output price volatility on farming and the agri-food sector Need for more timely data on production and prices in the

EU (from public sources) so as to enable the development of markets for risk related to agricultural commodities

More developed markets for agricultural commodity risk in the US (CBOT, CME) depend on relatively high frequency, publicly created data

CSO as part of the European Statistical “family” could have an important role to play in the production of such data

Development of market based risk mitigation tools (futures, options, derivatives etc.) will require this information in order to develop into tangible options for the European agri-food industry

Modelling and policy issues for the future:The importance of good data

Restructuring, Productivity and Factor Markets Essential that the CSO renew publication of data on

agricultural land prices and extends series back to the end of the current data set (Q1-2005)

One of the most important factors of agricultural production is land

Current agriculture structures and the cost of accessing land for purchase or rental (as well as agricultural policy) are likely to be important in explaining Irish agriculture’s productivity performance

Deeper understanding of productivity and barriers to restructuring and empirical research on this area requires information on this key agricultural factor market

Not appropriate that such price information is unavailable

Conclusions

CSO data central to Teagasc’s agricultural economics research programme and current and future policy analysis capacity

Large role still played by public policy in Irish and EU agriculture Taxpayers money being spent (market price support, direct income

support, research and development, extension services, education) We should have the means to assess whether it is being spent

wisely or could be spent better The mantra of “informed decision making” means work of agencies

such as the CSO is critical

Important gaps in our information about Irish agriculture need to be filled

Thank you

More information at www.teagasc.ie