H.-Chr. Behr*
ABSTRACT
The actual EC-market policy for fruit crops is criticized by consumers and agri-cultural economists, because it is believed to be inefficient and to create structural supply surplus in the long run. These pro-blems are likely to aggravate after the EC-enlargement, since Spain is an important producer of fruit crops. A market simula-tion model for perennial crops was cons-tructed to evaluate the long term effects of the actual and alternative market poli-cies on producers, consumers, trade, pro-cessing industry and the EC-budget. Fo-Ilowing a brief model description, the pro-blems of ineasuring the welfare of the af-fected groups and the criteria applied in the model are discussed. Finally exemplary simulation results of the European apple market are presented showing the distri-butional effects of the actual and alterna-tive market policies. The varied policy pa-rameters include the EC-intervention system, clearing subsidies and foreign tra-de regulations.
1. INTRODUCTION
The EC-market policy for fruit and ve-getables is facing growing criticism from consumers and agricultural economists, because it is believed to be inefficient and to create structural surplus supply in the long run. A point of special criticism is the EC-intervention system, since the quan-tities withdrawn from the market are partly destroyed. More than 90% of the-se market withdrawals consist ot fruit from perennials. The destruction of food causes great damage to the image of the
(") University of Hanover. Institute for Horti-cultural Economic. Hanover.
agriculture and the European Community.
These problems are likely to aggravate af-ter the EC-enlargement, since Spain is an important producer of fruit crops. The pur-pose of this study is thus to evaluate the effects of market policies, which avoid or reduce market withdrawals. Since the first model calculations were conducted for the European apple market the follo-wing chapters will concentrate on this product though the principal results can be generalized for all perennial crops.
2. THE EUROPEAN APPLE MARKET AND THE EC-MARKET POLICY FOR FRUIT AND VEGETABLES The production of apples in the EC grew rapidly until the end of the sixties. While total acreage of apples is decreasing sin-ce the early seventies, productivity increa-sed in the range of 1% p.a., keeping the EC production at its high level since 15 years. Imports from southern hemisphe-re countries hemisphe-remained rather stable during the same period, while imports from ot-her countries increased slightly. The per
capita consumption of dessert apples in the EC is stagnating or even slightly de-creasing.
In the early sixties the EC decided to in-troduce a common market organization for fruit and vegetables. In the following years, a combined system of foreign tra-de regulations and policy instruments on the internal market was established. The main foreign trade regulations are tariffs, reference price system, export rebates and quantitative restrictions. The policy instruments on the internal market inclu-de the intervention system (market with-drawals) and clearing schemes. While the deflated winthdrawal price was kept constant since the early seventies, defla-ted producer prices decreased in the ran-ge of 1,5% p.a. (Germany, F.R.^up to 2%
p.a. (France) resulting in an increase of EC-market withdrawals of 7.5% p.a.
(1972-19841. Annual market withdrawals of apples amount to 459.000 t(^ 1978-19831 or 8% of the commercial produc-tion. To reduce market withdrawals, the EC introduced clearing schemes (clearing subsidies and planting restrictionsl. Under this policy 55.000 ha of apple orchards were cleared between 1 st January, 1970 and 1 st April, 1973. It is very difficult to estimate the net effect Ipolicy induced clearings) of this measure, since a great number of orchards would also have been cleared without subsidies.
Apple production in Spain increased considerably until the mid-seventies and remained stable since then. Like in the ca-se of the EC a decreasing acreage was compensated by increasing productivity.
Apple imports into Spain are subject to ta-riffs and import quotas, while only few re-gulations exist on the internal market.
Spain will gradually abolish its national re-gulations and adopt the Common Market Organization for fruit and vegetables du-ring the transitional period.
3. THE SIMULATION MODEL
The relations between the main varia-bles of the model are shown in figure 1.
A more detailed description of the mar-ket simulation model is to be found in Behr (19861. The parameters of the model (ta-ble 1) have not been estimated econome-trically. To get an impression of the rea-listic range of elasticity coefficients, the model was tested in an ex-post-simulation of the West German apple market. Sen-sitivity analysis was carried out to deter-mine the effects of a variation of model pa-rameters.
The concept of economic surplus is used to measure the effects of policy changes on consumers and on the proces-sing industry. However, this concept is not applicable to measure effects on pro-ducers, since actual production is usually not related to actual prices. The change of producer income is calculated as ge of gross receipts reduced by the chan-ge of variable costs and opportunity COSiS.
The effect on public expenditures is cal-culated by summing up the changes of ta-riff revenues and expenditures for market withdrawals, export rebates and clearing subsidies. Assuming constant trade mar-gins and constant trade costs, the inco-me change of the trade sector is deduced from the change of the quantities traded.
4. MODEL CALCULATIONS
The main parameters of the model cal-culations presented are summarized in ta-ble 1. To enata-ble a comparison of the grap-hic representations of different simulation runs, random yield variations were intro-duced exogenously. The yields obsrved from 1976 until 1985 are used, this se-quence is repeated every decade. The Spanish accession to the Common Mar-ket is taken into account by gradually re-ducing the price difference between Spain and the EC and by gradually introducing the policy instruments of the Common Market policy in Spain.
If a policy of maintaining a constant de-flated withdrawal price is continued and productivity increases at the same rate as in the past, the quantities withdrawn from the market will rise considerably and may reach 25% of the total crop. To avoid a further increase of market withdrawals, the withdrawal price has to be reduced annually.The rate of reduction depends on the future development of productivity and demand. A further growth of market withdrawals is not likely at present, sin-ce the EC began to redusin-ce deflated with-drawal prices in the last two seasons. The-refore, a policy of reducing the withdra-wal price at a rate of -1.6% p.a. is cho-sen as reference policy. This rate of
an-SCHEMATIC DIAGRAM OF THE SIMULATION MODEL
MARKET SIMULATION MODEL
TOTAIAREA ANO AGE OISTRIBUTION
OF ORCNAROS
I
AOE/YIELD RELATION
PLANTINGS CLEARINGS
^ GRO55 RECEIPTS
PER AREA
ILAOOEDI ---^
POLICY PARAMETERS
r-^-^^^^^^^^^^^^^ -^^^^^-^^^^^^^^^^^^^^^^^^^^^^^ ,
DEMAND
^.__ I
COMMERCIAL
PRODUCTION PRICE
-D[SS[RTA^PL[ DEMAND - PPOCClSiNO _ N.I1[ET wi-NO^1.wALs -[RPOMT!
C1 C-ARINC, t.. ^^f+^ti E', ^^
OU4LITY STAND4RDS
PROCESSING AND STORAGE SUBSiDIES
WITNDRAWALPRICE
E><PORT REBATES
RANDOM YIELD VARIATIONS
IWE4TMER1
NON COMMERCIAI PROOVCTION
IMPORTS - 50VTNC^N NEMNIlPNER[
- NONTHCPN wCMN^lPNEPE -^PPI[! iOX PIIOC[SSIND
Figure 1. Schematic diagram of the simulation model.
^wo ^e ocT
TABLE 1
Parameter of the presented Model Calculations for the Apple Market in the Enlarged European Community
Start values at of slmulatlon
tne beglnning Price elasticity to conSlant Drod
with resDect u[er prlces
EG-9 SDain EG-9 SDain
Commerclal Productionl 5 503 ouo t 9Da oco t -
-Non Commerclal Production I l02 aoo t2) - -
-Oemend ( dessert apples) a 695 Soo t3) D69 Boo t - o. t to - 0.2 - 0.15 to - 0.1
Processing demand 1 055 2oo t 71 Dno t - I - f
Market vitndrawals 459 00o t 7t1 loo ta) - 1.5 - a.5
Eaports eatra EC-9 197 too t 2 aoo t - 0.7 - 0.7
Imports Soutnern Memnlspnere 355 00o t - 0.2
-Imporls Northern HemnlsDhere 59 ó0o t - t
-ADDIe ImDOrts for Processing 55 20o t - 2
-Total Area 204 293 na 53 toó ha -
-Annual PIanU ngs 7 Soo ha 1 Boo na 1.55) 1.SS)
Varlable COStS/ha 9 00o DM 5 100 DM
-DDDOrtunity Costs/na Boo DM Boo DM -
-Averaçe Price for Dessert Apples 61.2oDM/loo kg 55.o8DM/foo kg -
-Arerage Prlce forApples for 15.3oDM/too kç 13.lIDM/1oo kg - .
Processing
Average Prlce for Yfthdrawn 25.ooDM/too kg 2S.ooDM/too kg1) -
-ADDIes
1)Yield Increase of 1 1 D.a. (EC-9) and 1.5 1 D.a. (SDain) 2)Dnly Germeny, F.R.
3)Plus 703.00o t tlome consumptlon by growers tn Germany, F.R.
1)At the end of the transltlon period (1996) 5)Mitn respect to gross receipts/ha
nual price reduction will keep market with-drawals in the EC-9 at the present level.
In the first simulation run a policy of ag-gravated foreign trade regulations is com-pared with the reference policy. All im-ports are assumed to be restricted by an-nually negotiated import quotas (cf EC-self restriction agreements with southern hemisphere suppliers) to 50% of the un-restricted quantities. These import
restric-tions have a prices supporting effect in the first decade (figure 21, in the following de-cade, however, prices are lower than in the reference policy, since higher produ-cer incomes induce more plantings and thus result in a lagged Inon-bearing pe-riod) production increase. Market withdra-wals decrease slightly and only in the first decade (figura 3). The problem of lagged supply response is especially evident in
rI
TARIFF, REFERENCE PRICE SVSTEM AND
OUANTITATIVE RESTRICTIONS
:Frutas y Hortalizas=
i JO 00 - - qEi[R[r^CE
^ • ^ µTCRNATrvE
F ig . 2: OESSERT F,PPLE PRICE EC-9 F 19 • 4^ WELFARE EFFECTS EC-9
f^^/IOONL ui0 Du
iIDDC
90 0^
>a o0
so 00
JG DO
Fig.3:
IDJO^
7 ^DD ^
I.500
LD00
^DO
D
FIGURES 2 - 5
FAlling withdrawal price Ireference) versus falling withdrawal price and import restrictions (alternative)
I 000 ^
^DD
D
-soa
^ ^_L I I -I ooD l I
19E7 19!> 1993 1.391 7.007 3001 7.017 19E7 19BT 1,997 1,991 7,003 7.OOT 7.017
.E,R ,UR
MARKET 'J^'IIHDRAWALS Fi9.5: CHANGE OF PUBLIC EXPENDITUP.ES
- RE^C4^Nf.E
^ ' A1T4111`M1L
I ^ i • 1 ♦ • I ♦ i I -50
1.9e7 1.9e1 I Y97 1.99T 7,007 7,oaT 7.Ov
,v.q
ui0 Du I.D00 r
Figures 6 - 9
FAlling withdrawal price (reference^ versus abolition of market withdrawals (alternative)
Fig.6: DESSLRI AI'PLL f'RICE Fig.B: WELFARE EFFECTS EC- 9
Dr^^ioo Nc
IOOC,-9^ ^E
,o qF^
,^ q^
.q ^^I
Fiy.7: Ar,EA EC-9
L
ÁC*[zF^iCfFo.^,.,,[7UU.OLO
^ 90.000
^^J U ^0
, ,D,D^D
I c^ o00 ^_^- I I
^.ve7 i.9e1 La37 ^931 7un3 7ao7 3.oi7 rUR
-^- CNANLC PROD iNC pMC
^ -- CNANGC CONS SUR US
L^-1_ I L^--1_^
r Ve7 1.9e1 1,993 1.991 ].007 7.om 7.017
>^
1.982 ^.9D) 1,997 t.99T 7007 7.OJ1 3,G'.I
.E^R
Fig.9: CHñNGE OF PUBLIC EXPENDITURES uL DD
1,987 1,9E1 IL91 1,991 7.007 700' 3.017
Y(AR
the case of distributional effects (figure 4), le considerable gains of producer in-come Iresp. losses of consumer's surplus) occur in the first decade, the distributio-nal effects are negligible in the following period. The effects on the Ec-budget are of second order importance ( figure 5^.
Although this policy does not solve the problem of market withdrawals, it might be appropriate to support producer inco-mes in the short run, since the Ec-budget is hardly affected Itable 21. However, im-port restrictions are likely to create trade conflicts, which the EC intends to avoid.
In the second run the abolition of mar-ket withdrawals ( EC-intervention system) in 1982 is simulated. The decrease of pro-ducer prices is considerable in the first years Ifigure 61. This development indu-ces a severe reduction of new plantings resulting in a decrease of total area Ifigu-re 7) and production (lagged), so that pri-ces in the second decade reach or even exceed prices of the reference policy (market cyclesl. The loss of producer in-come Iresp. gain of consumer's surplus) is very high in the first decade Itable 2, figure 81 being less pronounced in the fo-Ilowing decades. Since saved public ex-penditures (table 2, figure 9) hardly vary in the simulation period and the loss of producer income decreases, the diminis-hing efficiency of market withdrawals be-comes evident.
Although the long term effects of this policy are much smaller than the short term effects, the abolition of market with-drawals without additional measures is not desirable due to the severe loss of pro-ducer income in the first decade.
In the last model calculations clearing schemes are compared with the referen-ce policy. In the first three simulation years a clearing subsidy of 5.000 DM/ha is paid which results in clearings of 60.000 ha (65% more than in the refe-rence polícy). During this period and in the following five years new plantings are res-tricted to 90% of the acreage, which would have been planted without restric-tions, since producers who benefitted from the subsidy are subject to re-planting restrictions. The effects of this policy (ta-ble 2) are similar to the effects of import restrictions. It is remarkable, thast this po-licy results in less public expenditures in the first decade (table 21, since the expen-ditures for clearing subsidies are more than compensated by saved expenditures for market withdrawals.
Clearing schemes are not appropriate to support producer incomes in the long run and may create or aggravate production cycles, unless such schemes are repea-ted or clearing subsidies are paid over a longer period. However, they seem to be more effective than market withdrawals, as far as the ratio of public expenditure to producer income is concerned.
Table 2
Welfare effects resulting from a change from t he reference po licy (1) to alternative market polici es
( million DM/year)
Change tu market policy . ..
Abolitton of Clearing
Change of ... Import restricttons market substdtes
wtthdrawals
Producer tncome
t. DecaJe 284.4 - 387.8 34t.9
2. Decade t.5 toó.8 - 143.6
3. Decade 3ó.5 - too.2 - 50.3
d Stmulattcn pertotl toB.o - 127.0 49.3
Con;umtr's surplus
I. Dec^c^^ - 236.4 423.8 - 390.5
2. Deca^7e 45.3 - 123.9 141.1
3. DecaJe 4.4 to3.o 6o.d
J Stmula!ton (artod - 62.0 33.0 - 62.1
Jt5[rioutor'>, tn^cme
I. Dec^oa - to.2 19.6 - 16.1
2. D^•caJe 2.2 - 3.0 5.8
3. u<ca;te o.9 8.7 3.t
d Stmulattcn pertod - 2.5 8.4 - 2.4
Proccs:or's ^urplus
t. DecaCe - to.o 28.7 - 17.8
2. D^c^de 2.5 - 1.2 7.5
3. L,.aae f.3 tt.7 4.2
0 Simul^tt::n period - t.9 t3.t - 2.0
^ EC-6uC)^t`^
t. Decadr to.0 + to8.t + 10.6
2. Deca^e - t9.4 + ttt.5 - 10.3
3. Dec^de - t5.4 + 89.4 - t3.3
0;tmulatton pertou - 8.0 + to3.o - 7.0
of whtch
Market withdrdwalS + 0.4 + to5.9 ♦ 2.2
Export SuDStdirs + o.t - 2.3 + 0.1
Tariffs - 8.S -- 0.6 + 0.7
Cleartng subsidies ± 0.0 ^ 0.0 - to.o
t)Market policy No 2 (withdrawal prtce - t•6 x p.a.) is reference policy 2) -= Expendtture (or less revenues); += kevenues (or less expenditures)
5. CONCLUSIONS AND OUTLOOK A policy of maintainign a fixed with-drawal price is likely to result in a further increase of market withdrawals due to in-creasing productivity. This problem will be aggravated, if the prospective decrease of demand is taken into account in the mo-del calculations. In the short run Ifirst de-cade) the introduction of a new market policy results in considerable price chan-ges. In the long run, however, the effects are of minor importance due to the expec-ted high long term supply elasticity ("gross receipts" elasticity of plantings).
A sudden change of market policies for perennial crops is likely to cause or aggra-vate production cycles, since supply res-ponse is lagged and supply elasticity is high. A combination of gradually abolis-hing market withdrawals and previous clearing subsidies seems to be an appro-priate policy to avoid the destruction of fruit without causing considerable public expenditures or losses of producer in-come.
REFERENCES
Alvensleben, R.V., 1982. The EEC Agricul-tural Policy and the World Trade with Fruit and Vegetables. Paper presented at the XXlst ISHS Congress, 29th Aug-4th Sep, Hamburg.
Behr, H.-Chr., 1986. A Market Simulation Model for Perennial Crops. International Sym-posium on Computer Modeling in Fruit Re-search and Orchard Management, ISHS, 10th Sep-13th Sep, Stuttgart-Hohenheim Ito be pu-blished in: Acta Horticulturae N° 184, Septem-ber, 19861.
Just, R.E., Hueth, D.E. and Schmitz, A., 1982. Applied Welfare Economies and Public Policy. Prentice Hall, Englewood Cliffs.
Weindlmaier, H., 1976. Zur Wohlfahrts&ko-nomischen Interpretation der Ergebnisse r^um-licher Gleichgewichtsmodelle. Paper presented at the 1 7th annual meeting of the GeWiSoLa, 7th Oct-10th Oct, Berlin.