The FAPRI-Ireland Partnership Developing the Outlook for Irish Agriculture Trevor Donnellan Thia Hennessy Rural Economy Research Centre Teagasc HQ

Overview What is FAPRI-Ireland What do we do? How do we do it? Aggregate Level Analysis Farm Level Analysis Future Developments - Interaction with Advisors

Agriculture: A Time of Change ? Dairy farmers should not be given the impression that the present system, with its intrinsic rigidities, can last forever. The recent debate on long-term prospects has revealed factors of uncertainty; in particular the results of the next WTO Round could also affect the dairy sector. (European Commission 1997)

FAPRI- Ireland Partnership: Who are we? Founded in initiated by John Bruton (when Taoiseach) Partners – Teagasc (Irish Ag. and Food Dev. Authority) – Nat. University of Ireland at Cork, Dublin, Galway, Maynooth and Trinity College FAPRI (Missouri -USA) Partner Project in Northern Ireland

Background Now in Second Phase - Continuation from Previous Project Previous Analyses – Commission Agenda 2000 Proposals (December 1998) – the Final Berlin Agenda 2000 Agreement (May 1999) – the London Club Agenda 2000 Dairy Alternative (Sept 1999) – the impact of Exchange Movements on Farm Income (March 2000) – the impact of a reduction or elimination of Export Subsidies (April 2001)

We Can’t Ignore the Outside World Irish Agriculture very export dependent Our Domestic market of lesser importance Must understand international scene International Policy International Supply and Demand Exchange rates

Linking FAPRI-Ireland to the Outside World FAPRI World Model FAPRI EU Model Ireland Macro Economic Models Ireland Model Ireland Farm Model

Types of Modelling Used Commodity Level Modelling – Econometric Modelling – individual models for each commodity – commodity models linked to form overall model Farm Level Modelling – Linear Programming – incorporating results of commodity models – representative farms selected and modelled Commodity Models Farm Models

Agricultural Output: Ireland 1999

Commodity Models Trevor Donnellan

Cereals Inputs Poultry Pigs Sheep Beef Dairy Milk Output Values Beef Output Values Sheep Output Values Poultry Output Values Pig Output Values Poultry Meal Prices Poultry Numbers Poultry Prices Dairy Cow Numbers Dairy Meal Price Cereal Prices, Production, Value & Hectares Cattle Feed Price Cattle Numbers Cattle Feed Price Pig Numbers Pig Meal Price Beef Cow Numbers Dairy Cow Numbers Commodity Model Inter Linkages

What this work is NOT Just remind ourselves this is NOT a forecast it is a projection Who could have forecast – China Accession – EU Expansion – Weather – 11th September ?

Projecting the Future: How do we do it? We don’t have a crystal ball !!!!!! Assume future policy Relationships between data analysed Models solved = “The Meltdown” Results go to Farm Models Models solved Consultations with Experts Final Revisions

How We Do It Macro Economic Projections - WEFA, Link, DRI Policy Assumptions Model Analysis Expert Review Final Analysis Or Baseline

Our Main Ability Is NOT that we can predict the future We can assess impact of new policies First we make a baseline projection Then we look at policy changes Produce policy change projections Look at the difference

Baseline Policy Assumptions Policies Currently In Place, Remain In Place International Agreements Hold No New Policies No New Policy Assumptions

A Scenario Elimination of Export Subsidies

Scenario:Export Subsidy Elimination Total abolition of export subsidies Related assumptions are important – Elimination of export subsidies could lead to a large build up of intervention stocks – Not a credible Commission approach – Must reduce intervention prices - so market clears – Intervention Butter price -20% and SMP -10% – Assume quotas remain in place up to 2010

Dairy : Export Subsidy Elimination Irish Farm Milk Price 3.7% fat Revenue of Irish Milk sector Under export subsidy elimination the 2010 price down 20% on 2010 baseline 2010 Value Down 20% on Revenue down 13% on 2000

Beef : Export Subsidy Elimination Irish Cattle PriceRevenue of Irish Cattle Under export subsidy elimination down 20% on 2010 baseline 2010 Value down 34% on Revenue Down 13% on 2000

Farm Models Thia Hennessy

How we model farms Representative farms Apply price projections to farms Impact on income Project how farmers will react

Representative Farms National Farm Survey farms Not all – ‘typical farm’ Cluster Analysis Homogenous groups Similar size, efficiency and demographics

Representative Dairy Farms

Representative Cattle Farms

Modelling the Farms Static analysis - no response Dynamic analysis – response Programming Models

Modelling Response Profit Maximisation – Farm net margin Max  =c t x t +c t+1 x t+1 +….c t+n x t+n subject to b t <a i x i +a j x j +……a n x n Complexity of agricultural policy e.g:extensification, premia schemes, livestock unit measures

Results of Static Analysis Gross Output remains static Price – cost squeeze Margins are falling Combat with economies of scale or efficiency Run faster to standstill

Results – Typical Dairy Farm

By 2010 farm margins are 35% higher than in 1998 (nominal terms) Purchasing quota leased and extra Increase in quota farmed by 25% (47,000) Negative impact on GM - Cashflow Results – Typical Dairy Farm

Results – Developer Dairy Farm

Developer farm margins up 35% by 2010 Increase in quota farmed by 35% Large farm margins up 15% higher in 2010 than in 1998 (real loss) Leased quota purchased no extra Results – Developer Dairy Farm

Results Small Dairy Farm Small dairy farm to exit Expansion uneconomical Price cost squeeze Lure of off farm incomes Part-time beef system

Results - Cattle Farms Key to Success Maximise Premia Payments All Farms Margins volatile from Small margins 30% higher in 2010 than in 1998 Extensification and SCP claimed on heifers Off farm job not an option

Results - Cattle Farms Large full-time margins volatile in short term but 15% higher in 2010 Benefits from SBP limit increase and rents more land continues as full-time farm

Results - Cattle Farms Part-time efficient farm will maintain 1998 margins in 2010 although volatile in the intervening period Reduce stocking rate to qualify for 1.4 Hobby farm by 2010 margins 15% below 1998 Cost structure - continue in farming?

Future Developments To develop PAT - policy analysis tool. PAT is a user friendly policy impact analysis decision support tool for use in farm planning and decision making.

Rationale Direct payments -large portion of income More complex criteria Many considerations Back of envelope planning outdated PAT can answers questions easily

How will PAT work? Based on FAPRI-Ireland farm models Use FAPRI-Ireland projections & scenarios User-friendly windows interface Enter farm data Initial development – user group

What answers will PAT provide? What will my profit levels be in 5 years if I don’t change current plan? What is my best strategy for the next 5 years? How will a new policy scenario affect my profits?

Benefits Of use to advisors Information to farmers Handle policy issues and maximise DPs Better understanding of policy issues Facilitates technology transfer Take policy analysis to a wider arena

So to Wrap Things Up Some Conclusions

What Can Make This Work ‘ Wrong ‘ ? Great uncertainty over Euro exchange rate World Economy Oil prices – will they or won’t they? Weather Different Policies pursued

Conclusions Commodity models examine policy at aggregate level Farm models take commodity model results and determine the effects on specific types of farms

Future Work Reform of the CAP More WTO Implications Environment - Kyoto European Models

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