November 1998                                          SCSB# 390

TRADE, POLICY AND COMPETITION:
FORCES SHAPING AMERICAN AGRICULTURE PROCEEDINGS

Chapter 1 Effects of Agricultural Policy Changes in the European Union on Selected Agricultural Products in the Southeastern United States Neusa M. Medeiros, Albert J. Allen, and Warren C. Couvillion Introduction The European Union (EU) created a single market in agriculture as early as 1962. An agreed upon goal of the EU, formally known as EC, was to keep the interests of farmers and consumers in balance. Policies to allow more competitive prices were adopted as a way to handle competition in the EU and elsewhere. The EU is the second major U.S. import market, taking 16 percent of total U.S. exports. Agricultural policies play a big role in trade and competitiveness. Any change in domestic policy in the EU can affect world trade as well as U.S. trade and in particular the Southeastern region of the United States In June 1992, the EC Council of Ministers updated the Community Agricultural Policy (CAP). The changes did not modify the three fundamental principles of CAP: (1) the creation and maintenance of a single market; (2) the respect of the notion of community preference; and (3) the commitment to common financing. Reform programs included changes in support regimes for arable crops (grains, oilseed, and protein crops), beef, dairy, sheep meat, and tobacco (Commission of the European Community). The outcomes of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT), now the World Trade Organization (WTO), gave the EU sufficient flexibility to manage its own internal policies. Export commitments could be met within the framework of the 1992 Single Market program (European Commission). Objective of Study The objective of this study was to identify and measure the economic impact of changes in the EU agricultural policies as a result of the Single Market Plan on prices, production, and consumption of selected agricultural products in the Southeastern United States (SE). To accomplish the objective, the Static World Policy Simulation Model (SWOPSIM) was used. The capabilities of and assumptions underlying the SWOPSIM framework (including estimation of behavioral parameters) are thoroughly discussed in other studies (Roningen and Praveen, 1989; Roningen, Sullivan, and Praveen, 1991; Hertel, Peterson, and Stout; Yu). The Model The SWOPSIM framework was used to develop four regions: the Southeastern United States; the Rest of the United States; the European Union; and Rest of World (ROW). The model included nine agricultural commodities: pork, poultry meat, wheat, corn, rice, cotton, soybeans, soybean meal, and soybean oil. Nine states account for the Southeastern United States: Alabama, Arkansas, Georgia, Florida, Kentucky, Mississippi, North Carolina, South Carolina, and Tennessee. The procedures for estimating the SE region data were as follows: production, consumption, production price, and consumption price data for the nine states were collected and adjusted for the units of measure required by SWOPSIM; then an average was calculated. The consumption data were based on the region's population. Southeastern consumption rates were assumed to be equal to U.S. consumption rates. Consumer prices were calculated by simple averages of the South urban regions. Producer prices were the average prices received in major producer states in the SE region. Data Sources Supply, demand, and trade data were obtained from the USDA's Foreign Agricultural Service supply and utilization database. World prices, domestic prices, and support data for the U.S., EU, and ROW are from the Economic Research Service (ERS) ST89 database, the 1989 global database for the SWOPSIM modeling framework. The models used USDA-developed (ERS/USDA), five-year own price and cross elasticity data for the various goods. The Southeastern elasticity matrices were assumed to be the same as the U.S. elasticity matrices. Domestic prices, demand, and supply data for the Southeastern Region were obtained from USDA and USDOC publications and Dunham. The relationship between domestic prices and world prices is assumed to be one, meaning complete price transmission for all commodities in the long-run. Export subsidies, price supports, and direct payments were represented by the differences between the trade price and the domestic incentive price, called a price wedge. In the model, export subsidies were decreased by 36 percent, while support prices by 20 percent and compensated by deficiency payments. The set asides in corn, wheat, and soybeans were calculated by shifting supply by an average of 6 percent. In order to compare the impact of policy changes in the EU and the possible effects on price, production, and consumption in the SE, three scenarios were analyzed: Scenario 1. Reduction of 36 percent in export subsidies. Scenario 2. Reduction of EU support prices, use of direct payments, and set asides. Scenario 3. Policies cited in Scenario 1 and 2 considered simultaneously. In the first scenario the results indicate the effects of a reduction of export subsidies on a specific commodity in all four regions and its cross effects on the other commodities. In the second scenario, the world model was solved by implementing policies such as reductions in price supports, direct payments and set asides. Scenario three combines all the policies of scenarios one and two. Results of the Analysis The EU trading partners, including the United States, have complained about the EU's heavy export subsidization support program in agriculture. Since EU internal prices are above world market prices, export subsidies are needed to move commodities into world markets. Major EU commodities subsidized are dairy products, grains, sugar, beef, and veal. Results show that the implementation of forthcoming EU policies will impact both U.S. and SE agriculture in mainly positive ways. The United States will retain the position of major exporter when compared to the EU. The results of these scenarios were compared with the 1989 base supply, demand, and price situation. The results depict the end of the agreement, when all policies will be put in action, ceteris paribus. Prices Higher world prices for almost all commodities in all scenarios resulted in U.S. and SE production increases. U.S. and SE consumption, as expected, decreased. Due to lower poultry meat prices for EU producers, the EU experienced a trade reversal from a net exporter to a net importer of poultry meat. In Scenario three, when all policy changes are measured simultaneously, producer and consumer prices for the SE increased (Table 1.1). Price results indicate the price impact of substitute and complementary commodity prices, and demand and supply effects throughout the model. In Scenario 1, decreasing export subsidies by 36 percent, the commodities most affected were pork, poultry meat, and wheat. This was expected because all three commodities were supported by export subsidies in EU. As shown in Table 1.1, SE producer prices for pork, poultry meat, and wheat increased by 1.97 percent, 3.07 percent, and 1.56 percent, respectively. Consumer prices for pork, poultry meat, and wheat also followed the same trend with increases of 0.98 percent, 1.71 percent, and 0.97 percent respectively. Similar results were obtained at the consumer level except that there was a decrease in the price of soybean meal. The percentage changes for pork, poultry meal, and wheat were smaller at the consumer level than at the producer level. Scenario 2 (Table 1.1) shows the results reducing price supports provided through administered prices and replacing them by direct payments. Set asides were also included in this scenario. Wheat and corn prices are administrated by CAP. For this reason they are the most affected price support reductions. Results show an increase of 3.80 percent and 2.60 percent in SE wheat producer and consumer prices, and a decrease of 2.43 percent and 1.94 percent in SE soybean meal producer and consumer prices, respectively. Southeastern producers and consumer prices for soybean oil decreased 7.19 percent and 3.59 percent, respectively (Table 1.1). When all policies are considered simultaneously (Scenario 3), increases in producer and consumer prices for almost all commodities resulted (Table 1.1). The commodities most affected are pork, poultry meat, wheat, soybean meal, and soybean oil. Increases in producer and consumer prices were: 2.08 and 1.05 percent for pork; 3.72 and 2.11 percent for poultry meat; and 4.43 and 3.65 percent for wheat. Producer and consumer prices for soybean meal decreased by 2.83 and 2.26 percent, respectively, while soybean oil prices decreased 6.96 and 3.61 percent, respectively. Production Production also increased and consumption decreased in the SE. These results are direct effects of higher domestic and world prices. Price increases can be explained by decreases in EU net trade for most commodities. In all three scenarios the cross commodity effects on substitute and complementary commodities, like corn to pork and poultry meat, and soybeans to soybean oil production changed significantly between scenarios one and three. In Scenario 1 (Table 1.2), SE production of pork, poultry meat, and wheat increased by 2.05 percent, 2.04 percent, and 0.80 percent, respectively. Soybean and cotton production did not change. Scenario 2 (Table 1.2) shows increases in the production of pork by 0.77 percent, and poultry meat by 0.58 percent. There were decreases in prices of soybean meal and soybean oil (Table 1.2) resulting in decreases in soybean meal and soybean oil production both by 1.05 percent. In Scenario 3 (Table 1.2), SE prices increased for almost all commodities. As expected, production increased for all commodities except soybean meal and soybean oil. SE wheat production increased by 2.26 percent (Table 1.2). There were also cross effects on pork and poultry meat. These commodities increased production by 2.18 percent and 2.40 percent, respectively. Results also show that soybean meal and oil will decrease in production of 1.10 and 1.93 percent, respectively. Results show increased corn production by 0.24 percent as a result of the 0.88 percent increase in corn producer prices and/or to cross effects (Table 1.2). Consumption In Scenario 1 (Table 1.2), reductions in pork, poultry meat, and wheat export subsidies resulted in increased world prices, which generated lower consumption in the SE. Pork consumption decreased by 0.78 percent, poultry meat 0.93 percent, and wheat 0.24 percent. In Scenario 2 price support adjustments in the EU drove consumption and production in opposite directions. SE domestic prices follow the same trend as world prices. So, when SE wheat producer prices increased by 3.80 percent, SE production and consumption reacted in the opposite directions. Wheat production increased by 1.90 percent, while consumption decreased by 0.59 percent. Higher SE producer prices for pork and poultry meat resulted in decreases in pork and poultry consumption of 0.14 and 0.16 percent, respectively. Although the SE producer price did not change, there was a decrease in production of 0.22 percent. Decreases in soybean meal (2.43 percent) and soybean oil (7.19 percent) probably caused increases on SE consumption of soybean meal (1.60 percent) and soybean oil (1.30 percent). In Scenario 3, SE consumption decreased for almost all commodities. Pork consumption decreased by 0.85 percent; poultry meat, 1.10 percent; corn, 1.21 percent; wheat, 0.68 percent; and soybeans by 0.66 percent. Consumption of soybean meal and soybean oil increased by 2.34 percent and 1.30 percent, respectively. Consumption of soybean meal and oil increased due to decreases on price of soybean meal (2.26 percent) and soybean oil (3.61 percent) (Table 1.2). Summary and Conclusions The present paper evaluates the effects of changes in EU agricultural policies on prices, production, and consumption of selected agricultural production in the Southeastern United States A four region, nine-commodity framework of the SWOPSIM model was constructed. In general, U.S., SE, and world prices follow the same path. The commodities most affected in SE are those directly linked with the policies applied in the EU, and also those which are supported less domestically. Cross-effects are evident in all three scenarios. This study shows that policy changes applied in the EU have many implications on price, supply, and demand in the world market. World and domestic prices show increases throughout all three scenarios, which means gains for Southeastern farmers. References Document Prepared by: Leigh H. Stribling, lstribli@acesag.auburn.edu Alabama Agricultural Experiment Station Auburn University

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