Conference “CAP Implementation in Estonia – Results and Future Outlooks” Global Trends of Agriculture Opportunities for Estonia Catherine Moreddu, Tallinn, 27 January 2015

Major changes driving agricultural policies and markets Rising economic importance of emerging economies affecting: 1.Supply and demand conditions on food and agricultural markets –Higher population and income lead growth in demand on food and agriculture markets –Level and volatility of prices – gone up, now back down –Emerging economies have dominated recent growth in international trade 2.With impact on changes in agricultural policies OECD Trade and Agriculture Directorate 2

1. OECD-FAO Agricultural Outlook Real agricultural prices expected to decline slightly, but remain above levels before food price crisis. Changing relative prices: –Coarse grain and oilseed prices increase relative to food staples – feed and fuel demand –Meat and dairy prices increase relative to crops – higher incomes and protein demand OECD Trade and Agriculture Directorate 3

1. Real food prices still high but returning to levels of the mid-1990s 4 Source: IMF

5 Index, = 1, Based on Production Value 1. Outlook project modest declines in real prices

1. OECD-FAO Agricultural Outlook Real agricultural prices expected to decline slightly, but remain above levels before food price crisis. Changing relative prices: –Coarse grain and oilseed prices increase relative to food staples – feed and fuel demand –Meat and dairy prices increase relative to crops – higher incomes and protein demand Agricultural markets expected to be less volatile than in recent years due to a recovery in stocks…but that could change! OECD Trade and Agriculture Directorate 6

1. Commodity price volatility back to pre-crisis levels (Number of commodities whose volatility was above 25%) Source: Baffes (2014) from ICE, CME, and World Bank calculations. 7

1. Changing diets imply different demand effects Grains: core of human nutrition, slow growth driven by population increase. Protein: (meat, fish, dairy): meat sector dominated by poultry, highest growth rates for dairy products Fats: (vegetable oil, butter): fast growth in developing countries based on changes in eating habits Sugar: Accelerating growth both in developed and developing countries. 8

1. Changing regional patterns of production and trade Africa Significant production expansions are mitigated by population growth Asia Accounts for nearly half of all additional consumption and production in the world Latin America Increasingly export oriented meat and grain sectors as domestic consumption growth slows Major OECD economies Stable food consumption and growing livestock and biofuel production sectors 9

1. Outlook assumes constant policies and “normal” market conditions, but there are risks: »Slower economic growth in emerging economies (BRIICS) »Energy prices & links to commodity markets (+biofuels) »Agricultural and trade policies »Trade agreements »Biofuel policies Long-term structural uncertainties: »Rate of agricultural productivity growth (Cst) »Consumption patterns (including waste) »Natural resource constraints & environmental impacts »Climate change 10

2. Agricultural policy challenges Respond to growing and changing demand for food, feed, fuel and fibre –Increasing productivity growth and sustainability along the value chain (using resources more efficiently and avoiding waste) through innovation and structural change –Improving the functioning of food and agricultural trade and markets For agricultural policies, this implies: –Reducing distortions to production and trade –Removing impediments to structural adjustment –Improving the targeting of measures to outcomes More generally paying attention to the broader policy and regulatory environment 11

2. Agricultural policy changes Support and protection decrease in OECD countries But increase in some emerging economies Both apply “New” policies that subtract from world supplies (export restrictions, biofuels) Renewed focus on increasing productivity and sustainability to improve competitiveness –Specific measures targeting adoption of innovation, more sustainable practices, adaptation to climate change –Conditions on agricultural practices 12

2. Lower and less distorting support in the OECD area Producer Support Estimate (PSE) as a % of gross farm receipts, Source: OECD PSE/CSE database,

2. In particular in the European Union Producer Support Estimate (PSE) as a % of gross farm receipts, Source: OECD PSE/CSE database,

2. Wide diversity across OECD countries Producer Support Estimate (PSE) as a % of gross farm receipts, Source: OECD PSE/CSE database,

2. Conditions on production practices in some countries Producer Support Estimate (PSE) as a % of gross farm receipts, Source: OECD PSE/CSE database,

2. But support levels increase in emerging economies Source: OECD, PSE/CSE database, Producer Support Estimate (PSE) as a % of gross farm receipts, Source: OECD PSE/CSE database,

2. Number of AMIS countries with export taxes, quotas and bans on wheat, rice, maize and soybeans 18

2. Issues for agricultural policy Move away from policies that distort markets, restrict competition and contribute to higher and more volatile food prices Reduce impediments to structural adjustment (land, labour) Focus on improving long-term competitiveness –Efficient tools for risk management –Incentives for the adoption of innovation –Outcome based measures to promote environmentally-friendly practices, adaptation to climate change, animal welfare and respond to societal demands –Provision of innovation enhancing services (R&D, advisory services, inspection and control, infrastructure) –Provision of information to improve decision-making Improvement in the broader policy environment OECD Trade and Agriculture Directorate 19

2. Innovation for agricultural productivity and sustainability: framework OECD Trade and Agriculture Directorate 20 INNOVATION NATURAL RESOURCE USE STRUCTURAL CHANGE Economic stability and trust in institutions Market incentives for investment Capacity building Provision of services Targeted incentives Macro- economic Governance Regulations Trade and investment Finance/Credit Taxation Infrastructure Labour Education Agriculture Innovation Policy areasIncentive areasDrivers of growthOutcomes Productivity Sustainability

2. Innovation for agricultural productivity and sustainability: Policy impact Policy environment that favours investment: stability, trust, clear regulations, competition, well-functioning input and output markets and trade, access to credit, taxation Capacity building: rural infrastructure and services, flexible labour markets, education and skills responsive to demand Improve governance and funding mechanisms of agricultural innovation system to generate innovations adapted to demand, with wider adoption, and more efficient use of public funds – public-private roles, international cooperation to meet wider challenges OECD Trade and Agriculture Directorate 21

2. What does it means for Estonia? - CAP Reformed CAP offers some opportunities to redirect funds towards productivity and sustainability –Risk management, value-chain organisation, change in practices and equipment, Farm Advisory Service –Removal of dairy quotas should improve resource allocation and improve productivity further, but investment in technology by larger farms is also needed (Farm-Level Analysis) –Income support, in particular if targeted to smaller farms, is not an effective tool OECD Trade and Agriculture Directorate 22

2. What does it means for Estonia? – and more Not all solutions are within the CAP –Other EU policies: rural infrastructure; R&D cooperation –EU and national regulations (business, natural resources, products and processes) to improve competition and market functioning: simplification, coordination, property rights (e.g. IPR, land) –Most national policies affect production costs and capacity to innovate: credit, public services and infrastructure, education, etc. An important role for the government is to provide information: –on markets opportunities, organisational and technical solutions for food and agricultural producers –More widely on innovation to increase acceptance in the wider public OECD Trade and Agriculture Directorate 23

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