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Review of Economic Research Programme 2003

Agri-Food Economics and Rural Development


Policy analysis

  • During 2003 Rural Economy Research Centre published three separate analyses of the potential impact of CAP reform policies. The EU Commission had published their mid term review of Agenda 2000 in July 2002 which proposed the decoupling of direct payments but did not provide details. The first analysis, published by us in January 2003 examined, in the absence of firm details from the Commission, the impacts of a particular decoupling scenario, which had been agreed for analysis with the Department of Agriculture and Food. This indicated the likely direction of the impacts of a decoupled regime.

  • The second analysis, published in May, examined the likely impact of the specific proposals made by the EU Commission for the CAP.. The decoupling of direct payments and new dairy sector proposals were included. In addition the study incorporated the EU WTO ‘modalities’ proposal of January, 2003. This analysis also included publication of a more up-to-date baseline against which the policy changes could be measured

  • The third analysis, published in October, examined the likely impact of the actual agreement concluded in Luxembourg on the Reform of the CAP. This included, among other things, analysis of full and partial decoupling options.

  • Each analysis projected the impact on aggregate production, prices and aggregate incomes of the proposed policy changes, compared with a baseline of no policy change. The farm level effects of the scenarios were also analysed.

  • The impact of the policy reform on ‘greenhouse gas’ emissions from agriculture was examined in the first and third studies.

  • Each of the analyses suggested that in aggregate terms the proposed new policy would result in higher levels of farm incomes than existing policy. In the third analysis alternative scenarios in relation to the degree of decoupling were examined and higher levels of farm income were projected for the maximum decoupling scenario. It is probably fair to state that these reports were instrumental in winning the support of farming organisations (who were initially opposed) and the Department of Agriculture, initially to the principle of decoupling and subsequently to implementation of a maximum decoupling regime in Ireland. The results from the farm level analysis showed the distributional effects of each scenario examined.

  • The work of the FAPRI-Ireland Partnership provided policy makers in Ireland with timely, quantitative and unbiassed assessments of the policy options available to them. The work was also useful for interest groups representing different parts of the agricultural sector in Ireland.

New contracts

Staff were successful in collaboration with other EU partners in winning three new research contracts under the EU 6th Framework Programme. These projects on Multifunctionality, Agricultural Environmental Schemes and Decoupling will begin in 2004.

A number of projects funded under the EU 5th Framework Programme which were begun in 2001 were brought near to completion. (These include projects on building a projection model of the EU agricultural sector, on integrated rural tourism, on factors affecting peripherality and developing a method for estimating the costs of a quarantinable disease policy.

Projects on Economics of Cattle production systems, Indicators of Competitiveness and Supply Control Options in Beef were completed during the year.

Dissemination

  • The annual Situation and Outlook conference was held in December, and attracted a large audience and extensive media commentary.
  • Staff contributed papers to international scientific conferences at Faro,(P) Benevento (I), Durban (RSA), Minneapolis (USA), Copenhagen (DK), Edinburgh (UK), Brussels (B), Chania (GR), Plymouth (UK), and Perth (Aus).
  • Staff from the FAPRI-Ireland project appeared on the ‘Ear to the Ground’ and ‘Primetime’ television programmes.
  • Staff spoke at numerous meetings of policy makers, industry representatives, farm organisations and other Teagasc staff, aboutthe proposed policy changes.

Among the major research findings published during the year were the following

  1. At the Situation and Outlook Conference, margins for the different agricultural enterprises were reviewed. Further reductions in milk prices contributed to a decline of about 2% in margins from dairy farming, in 2003. This followed a drop of 20% in margins in 2002. A fall in milk prices by about 4% in 2004 was forecast. While the introduction of EU compensatory payments will offset the price drop, a decline in calf prices combined with cost increases will result in continuing pressure on margins in dairy farming.

    Margins from beef increased by around 8% on average in 2003, due to a small reduction in costs and additional revenue from higher slaughterings and direct payments. The prospects for 2004 point to a drop in margins of around €100 per hectare (€40/acre).

    Tillage farmers experienced a substantial improvement on the very poor performance in 2002. Margins for the two major cereal crops, spring barley and winter wheat, were up by 44% and 25% respectively. Increased yields and prices resulted in an increase in margins from sugar beet while lower prices led to a drop in margins from potato growing. The indications for 2004 are for some drop in margins from grain growing. However, this will depend greatly on weather conditions in the major international grain growing regions. The margins from sugar beet and potatoes are forecast to increase, primarily due to increases in yields.

    The past year brought further difficulty for pig producers. Lower prices and increased cost resulted in a decline of around 5% in margins. While overall prospects for pig prices in 2004 are reasonably good, escalating feed costs will severely curtail any increase in margins leading to a further difficult year for producers

    The 10 year cycle of decline in sheep numbers was arrested in 2004 with a small increase in the national breeding flock. Higher production costs and lower lamb prices led to a drop of around 5% in sheep margins in 2003. The prospects for 2004 are for a further decline in margins.

  2. A survey, carried out among a representative sample of 1,200 farmers involved in the Teagasc National Farm Survey showed that 42% thought that the decoupling of farm payments from production would not have any impact on their incomes. Forty per cent expected their income to decline while 10% expected an increase.

    Dairy farmers were most pessimistic about their income prospects, with almost two-thirds indicating that they expected the recent EU agreement to result in a drop in income.

    Notwithstanding the divided opinion on the impact of the reforms on income, the vast majority of farmers fully supported the new policy direction. Eighty five per cent of those surveyed said they were in favour of complete decoupling of payments from production.

    Farmers were also questioned on their investment plans for 2004. The results indicated a planned investment of almost €300m. Planned investment in machinery and buildings was down by 9% and 23% respectively from 2002, while investment in milk quota is planned to double. It should be noted that farmers always understate their planned investment. While the 2002 survey showed a planned investment of €290m, actual investment in 2003 was almost €500m.

  3. Full decoupling of all EU farm payments from 2005 is the best available policy option for the Irish agricultural industry according to the analysis of the impact of the Luxembourg Agreement on CAP reform, published in October, which showed that the highest level of farm income would be achieved by full decoupling, or the complete removal of the link between payments and the level of farm production. Full decoupling, combined with some changes in agricultural trade policies under the World Trade Organisation (WTO) talks, would lead to a 10% increase in aggregate farm income in 2012 compared to the income level that would occur under current policies.

    This confirmed earlier analyses that no change in policy was a poor option and would lead to a decrease of more than 9% in farm income by 2012. Partial decoupling of payments from production, an option allowed under the Luxembourg Agreement on CAP reform, could deliver an income increase of as little as 4% depending on the payments which were partially decoupled.

Beef

The analysis showed that full decoupling of all beef payments from production was overall the best option for incomes from beef production. Full decoupling would lead to a decline of around 18% in suckler cows, leading to a drop of 7% in the amount of beef produced. However, price increases of around 10% and reduced farm costs would result in the best income prospects for beef producers. The majority of beef producers would be better off as a result of full decoupling of payments. The main losers would be the larger, commercial farms. While these account for a relatively small number, there would still be a substantial amount of money redistributed from this group across a large number of small beef farms..

Dairying

The Teagasc analysis showed that the recent decision by the Minister for Agriculture and Food to decouple dairy compensation payments from production from 2005 would secure the future of the greatest number of dairy farmers. It would provide a more attractive exit strategy for less efficient dairy farmers and a larger pool of milk for dairy farmers with the means to expand than would be the case if the decoupling of dairy direct payments was delayed until 2008, which was an alternative option

Earlier decoupling gives dairy farmers the option to quit the sector while retaining their payments. This will lead to a more gradual restructuring of milk quota than would be the case with delayed decoupling, and will lead to more dairy farmers in the long term. The analysis showed that the new arrangements would result in a decline in dairy farmer numbers from slightly less than 27,000 at present to 18,000 in 2012, with an average milk quota of almost 300,000 litres (65,000 gallons). Under the Luxembourg Agreement Farm milk prices will fall by about 5% more than would have happened under current policies. Butter prices will fall most with reductions also for the other commodities such as skim milk powder and cheese. However, direct payments and increased scale should result in average dairy farmer incomes keeping pace with inflation over the next eight years.

Sheep

Rural Economy Research Centre analysis showed that, while the national sheep flock was set to decline substantially under existing policies, the introduction of decoupling would accelerate this decline. Overall, sheep numbers in 2012 will be more than 20% down on current levels. However, this decline will be offset by increased prices, leading to a slight increase in the value of sheep output by 2012.

Full decoupling would have a small effect on cereals. The area planted would fall, leading to a small decline in the value of output.

Greenhouse Gases

The analysis showed that, as a result of full decoupling, emissions of greenhouse gases from agriculture by 2010 will have fallen by 14% below the estimated 1990 level. These cuts in greenhouse gas emissions from agriculture should ease the pressure to reduce emissions in other sectors of the Irish economy, making it more feasible for Ireland to meet the targets set out in the Kyoto agreement.

4

Irish agricultural income would suffer a drop of almost 10% over the next decade if current EU policies were maintained, according to the analysis published in May of the impact of the Commission's original proposals. The analysis, also showed that the full implementation of the proposed EU CAP reform combined with some changes in world trade policies under the World Trade Organisation (WTO) talks would result in agricultural income in 2012 being similar to that in 2002.

No change in current policies would result in a decline in prices for the major dairy products, butter, skim milk powder and cheese, leading to a drop of around 15% in milk prices compared with prices received over the last three years. Beef prices would only show a slight fall over the same period. The impact would be a decline of 8% in the value of output. Farm input costs would increase by 3%, resulting in a drop of 9% in the net income generated in the agricultural sector.

This no policy change was compared to the full implementation of the existing EU proposals on reforming the Common Agricultural Policy combined with implementation of the EU proposals to the WTO on changes in world food trade. These involved the EU cutting its export subsidies by 45% and reducing tariffs on imports to the EU by 36%. Compared with no change to current policy, the impact of the EU proposals would be a bigger decline in prices for the major dairy products, leading to Irish milk prices declining by over 10% on the levels that would apply if current policies were pursued.

Beef cow numbers in Ireland would decline by 16% and beef output would fall by 6%. Beef prices would fall initially but, by 2012, would be 8% higher than if current policies continued. There would be a major re-orientation of beef exports, with 95% of exports going to EU markets.. The combined CAP reform and WTO changes would lead to a decline of 2% in the overall value of agricultural output by 2012 compared with a continuation of current policy. Under these circumstances, expenditure on inputs by farmers would fall by 7%.

By 2012, overall agricultural income would remain at the 2000/2002 average. Due to the 'decoupled' subsidies and the drop in beef production, the proportion of farm income coming from subsidies would rise from 65% in 2002 to 75% in 2012.

The majority of Ireland's dairy and beef farmers would do better as a result of the implementation of the EU proposals for reforming the Common Agricultural Policy. The new policies would result in a rapid acceleration in the decline in the number of dairy farmers. However, dairy farmers who stay in production would be better off due to a substantial increase in milk output. Those who leave the industry would also do better because of EU payments.

The number of dairy farmers would decline from 26,500 at present to 15,000 by 2012. Average milk output per farm would increase from the current level of 188,000 litres (42,000 gallons) to 320,000 litres (70,000 gallons) while the 15,000 remaining dairy farmers would have incomes 25% higher than if current policies continued. The analysis shows that the exodus from dairying would be significantly faster than if current policies were continued, due to a combination of lower milk prices and the availability of compensatory or 'decoupled' payments.

5

The Teagasc National Farm Survey for 2002 showed a decline of 5.8% in farm income, bringing average income per farm to €14,925. Average income in 2001 was €15,840. The income decline resulted from a drop of over 2% in the value of output. Farm production costs increased by 3.5%. However, the level of direct payments received by farmers in 2002 increased by 17%, which partially compensated for the decline in returns from the marketplace.

The survey was based on an analysis of accounts kept on almost 1,200 farms. The total numbers of farmers represented is 116,400. Around 20,000 small farmers are excluded as are pig and poultry producers.

The survey showed an enormous variation in incomes between the larger dynamic full-time farmers and the smaller part-time group, who are highly dependent on direct payments and off-farm employment.

It shows a total of 44,500 full-time farms – with a minimum of 0.75 labour units. The average income of these farms in 2002 was €27,758, a decline of 10% on their income in 2001. These full-time farms, which account for 40% of all farms, represent the more dynamic, commercial sector of farming. About 60% are involved in dairying, with the balance involved in tillage, beef and sheep production.

The remaining 60% of farmers had an income from farming of just €6,590 in 2002. The majority are part-time beef/sheep farms and 82% had another source of income. The survey shows that, on 48% of farms, the farmer and/or spouse had an off-farm income. On 35% of farms, the job was held by the farmer, an increase of 2% on 2001.

The largest income decline took place on dairy farms. Average dairy income was €28,100, a drop of 18% on 2001. Income in tillage farming, declined by 9%, to an average of €21,900. Larger tillage farmers suffered an income decline of up to 23%.

Average income from beef increased in 2002, albeit from a very low base. Incomes from cattle rearing systems increased by 7% to an average of €7,750, while incomes from other beef systems increased by 22%, to an average of €9,520. Incomes in sheep farming, at €12,350, were 2% up on 2001.

The survey shows a big increase in the contribution of direct payments to farm income. Direct payments made up 90% of average income on all farms represented by the survey, compared with 72% in 2001. The final increases in direct payments under the EU Agenda 2000 agreement were paid in 2002.

Direct payments accounted for over 100% of income on beef and sheep farms. In tillage farming, they accounted for 110% of income, reflecting lower yields and reduced prices. In dairy farms, direct payments accounted for 33% of income, up from 22% in 2001.