Model based economic analysis of Irish agriculture using CSO data

2. 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 Library Dublin Castle

3. 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

4. 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

5. Commodity Market and EAA Modelling • At 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

6. Output Price Volume Input Price Volume Subsidies Sectoral Income p.Q w.X G ∏ Commodity Market and EAA Modelling

7. 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

8. Models and Data: FAPRI-Ireland FAPRI World Model CSO & Eurostat databases NFS Database DAFM, EC, OECD FAPRI EU model FAPRI-Ireland Aggregate Sector Model FAPRI-Ireland Farm Level Model ESRI Hermes Model

9. 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

10. CCSMTIE Cattle Imports CCUXTIE Cattle Exports CCUDLIE Cattle Death Loss BVITTIE Beg. Beef Stocks BVCCTIE Ending Beef Stocks CCPFHE5 EU Price CCOCAIE Other Cattle CCKOTIE Other Cattle Slaughter BVCCIIE Change Beef Stocks CCKTTIE Total Cattle Slaughter BVSPRIE Beef Production CCSPRIE Calf Crop CVKTTIE Calf Slaughter CCPFHIE Domestic Price BVUDCIE Domestic Use BVUPCIE Per Cap. Domestic Use CSKTTIE Cow Slaughter BCCCTIE Beef Cows Ending DCCCTIE Dairy Cows Ending CCPFHE5 European Price BVUXTIE Beef Exports CCSLWIE Cattle Slaughter Weight BVSMTIE Beef Imports BCITTIE Beef Cows Beg. DCITTIE Dairy Cows Beg. BVUXTE5 Total EU Beef Exports BVSMTE5 Total EU Beef Imports BVUXNE5 EU Beef Net-Exports BCEGMIE Suckler Cow Returns Beef Flow Diagram

11. 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

12. Output prices Input prices Activity levels Input demands Commodity S&U balances EAA elements CSO European Commission (DG Agriculture and Rural Development) Eurostat Department of Agriculture, Food and the Marine Macroeconomic variables Agricultural and trade policy data Technical information on input use Technical info on biological constraints ESRI Department of Agriculture, Food and the Marine OECD European Commission Teagasc colleagues Data requirements:Or what do the CSO do for us!

13. 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

14. 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

15. 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

16. 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

17. Baseline 2021vs 2011: Goods Output Value at Producer Prices

18. Baseline 2021: Output vs. FH2020 Targets

19. Operating Surplus 2012-2021

20. Operating Surplus 2012-2021 2009 Total net subsidies > Operating Surplus

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

22. 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

23. 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

24. 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

25. 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

26. Thank you More information at www.teagasc.ie