CARACTERIZACIÓN MICROSCÓPICA

AGMEMOD assumptions and limitations

Several assumptions were made during the modelling of the impact of $100 oil price as a result of constraints of the model, exogenous data and the time scale of this research project.

CAP policy instruments are fixed at 2005 level; in other words set aside and production quotas for milk and sugar are kept in place.

The oil price does not appear directly in AGMEMOD. At the global macro-economic level, an increase oil price will have an impact on exchange rates, gross domestic product (GDP) and economic growth. The impact depends on each country’s and each industry’s dependency on oil and their ability to reduce this dependency. It was not possible to quantify the $100 oil price impact on the exogenous macro-economic variables in the model; they are assumed to equal those of the baseline.

At the consumer side, a high oil price can create a dramatic shift in consumption patterns. There will be both an increased demand for products and services that depend less on energy, but there will also be a smaller available budget. It is assumed that the structure of demand equations will not change, nor the responsiveness to agricultural prices.

A $100 oil price will increase the production costs of all commodities that use energy in its manufacturing. In addition, the costs of transporting commodities to their markets will also increase. For processed products, further costs increases can be passed onto the customer through the price. It is clear that the price of nearly all products will increase. In the model, additional energy costs have been included at the farm-level only. The increased costs of transport and processing could lead to a higher demand for local produce. It is not possible to quantify this effect on trade in agricultural commodities.

There could be an increase demand for fuels from crops, i.e. bio-ethanol and biodiesel. It is expected that the area of crops for biofuels will increase. At the same time, a smaller area of land is available for food crops; thus their prices will rise further. The production of bio-fuels is a recent phenomenon and, within the EU, relies heavily on subsidies. It is therefore difficult to estimate the response in the area of fuel crops. It is assumed that the area of crops for bio-fuels does not alter from the baseline scenario.

Information on agricultural production costs in other EU countries have not been incorporated into their production decisions. As a result, they will face the higher output prices without the additional energy costs and therefore will increase their production. The inclusion of energy costs for these countries’ models would further reduce the aggregate EU supply and increase the output price. The models that did include these costs, including the UK model, will therefore overestimate production changes.

Aglink assumptions and limitations

Energy cost shares are calculated from production cost data for only two countries. US data is applied for all OECD countries, while Argentinean data is applied for all Non-OECD countries. Most cost calculations are subject to a considerable degree of uncertainty. Cost estimates in the literature vary widely, and their applicability to other regions introduces some degree of uncertainty. The assumptions used in OECD’s

Aglink-Biofuels model will not be the same assumptions as those used in the SDC study. This inconsistency needs to be borne in mind when prices from the Defra analysis, based on the Aglink-Biofuels model, are used in conjunction with other models for the SDC project.

Biofuels are assumed not to be traded, therefore increases in demand for biofuels are modelled to be sourced within the region itself. As such the impact of national

biofuels policies on national prices will probably be overstated. This needs to be borne in mind when national prices (e.g. US prices) are used as an indicators for the level of the ‘world price’.

The modelling is based on 2005 OECD Outlook baseline. Recent developments in commodity markets are therefore not included in the analysis, ie the recent increases in demand for cereals and oilseeds for biofuel production are not included in the baseline.

Indirect impacts of the oil price on agricultural markets through the biofuel markets are modelled but the modelling is only partial in its geographic coverage and there are uncertainties and limitations related to the modelling. The modelling is limited to five regions (US, EU15, Poland, Brazil and Canada). Also the modelling draws on data from a 2005 paper. The biofuel market is evolving at great speed and some of the assumptions will be out-of-date. In addition, the biofuel market is still at an early stage and therefore there is a lack of data e.g. on elasticities of demand and supply with relation to the oil price and commodity prices.

Biofuel demand and supply is largely policy driven – some of the policies have changed since 2005 and more changes are ahead. There are market implications through the food demand side of the economy, which are ignored in the analysis. With higher crude oil prices GDP growth is likely to be lower in most countries, while it may be higher in oil producing ones. This may have an impact on food demand. For more detailed description of the assumptions and limitations see

http://www.oecd.org/dataoecd/58/62/36074135.pdf

Assumptions and Limitations of combination of Aglink and AGMEMOD The AGMEMOD model includes only agricultural sectors of EU15 countries. World market prices are treated as exogenous. Without the results from Aglink modelling on the impact of a $100 oil price on world market prices of agricultural commodities, AGMEMOD would only be able to model the impact of a rise in production costs on agricultural sectors in EU15 countries (See Table 4).

The descriptions of the AGMEMOD and Aglink models above demonstrate that there are some differences in the methodology and assumptions. Also, there were

differences in the historical data series, as well as in the projected baselines. The relative change in world market prices from the Aglink $100 scenario compared to the Aglink baseline were applied to the AGMEMOD baseline. This may impact the results in levels, i.e. prices, areas and livestock numbers, but the relative changes will be similar.

The world market prices in Aglink are the result of international trade in commodities. However, they are exogenous after being imported into AGMEMOD, There is no further interaction between the aggregate net-trade position of the EU15 and

international commodity prices. In other words, the projected net-trade of AGMEMOD should converse to that of Aglink.