Public support to agriculture is one of the main features of the Common Agricultural Policy (CAP) of the European Union. The CAP spends almost half of the EU budget, EUR 47 billion in 2004. Moreover it transfers a further amount of economic resources from EU consumers to farmers by protecting the domestic market and supporting farm prices. According to OECD[1], in year 2003, the total producer support to agriculture in the EU is estimated in EUR 108 billion, an amount of economic resources larger than the whole EU budget (EUR 101 billion).

Such huge income transfers generated by public support are almost as large as the net value added of the agricultural sector and have raised many critics by economists and by international organizations, including OECD, Member States, and Directorates of the EU Commission. In particular the CAP was constantly accused of wasting large amounts of public money[2] and of generating a perverse redistribution of income among EU citizens. Higher food prices operate as an income regressive tax on consumers, while such income transfers are largely proportional to farm sizes and to the wealth of farmers and landowners.

Notwithstanding such heavy drawbacks of the CAP it has been extended to the New Members of the EU and will be extended to the candidate countries when joining the Union. The CAP is already the agricultural policy applied on the largest part of Europe affecting the well-being of all citizens. In this paper we will try to assess the likely impact of such policy on consumers, taxpayers and agricultural producers, if implemented by Russia.

In order to estimate such impact it is necessary to evaluate the present impact of the Russian Agricultural Policy (RAP) in terms of income redistribution and resource allocation with reference to a free-trade scenario (FT), without public intervention in agriculture.[3] By estimating the impact of a CAP-like policy with reference to same the free-trade scenario, it will be possible to assess, by difference, the impact of a change from the present Russian agricultural policy to a CAP-like policy.

Such estimates can only be indicative and not precise for a number of reasons, among which the more important are the following.

a) the existing price elasticity of demand and supply for various commodity groups in Russia are largely unknown. Comparable and updated econometric estimates of such parameters are not available and, in any case, the future behaviour of consumers and producers could differ from the past, for various reasons. Our assumptions on demand and supply price elasticities produce results in terms of income redistribution flows among producers, consumers and taxpayers which would not dramatically change under alternative assumptions in the range of available results of econometric analyses done in various countries. The size of such flows are much more related to national quantities produced, consumed and traded, and on changes in average prices rather than on the assumed slope of demand and supply functions. As a consequence our estimates should be substantially useful for policy analysis.

b) As a reference scenario we assume present world market prices as an opportunity cost for imports and exports. Such assumption is common for small countries, however EU-15 and Russia are large countries in the present world market for agricultural commodities and international terms of trade would change if substantial changes in price support measures were implemented. In order to take into account such changes a general and possibly global equilibrium model should be formulated and all parameters estimated. In this paper we prefer to present partial equilibrium analyses which are more easily computed and understood, especially by policymakers, and in our opinion provide sufficiently clear information on possible alternative policy changes.

c) Our estimates refer to the effects of price changes at producer and consumer level, assuming a rather short term adjustment. In the longer term various other policy variables become important in determining demand, supply and farm incomes. Changes in consumer preferences, partially related to better standards of living, modify consumer demand, while research, technological developments and government policies in the land and labour market may substantially influence agricultural supply. Marketing margins between consumers and producer prices are assumed not related to changes in agricultural policies. However, especially in the longer term, structural changes in the food processing and distribution industry may modify marketing margins affecting both consumer expenditure and farm incomes.

A description of the methodology followed in such estimates is available in the Appendix (chapter 5). Ten commodity groups are analysed: wheat, maize, other grains, oilseeds, sugar, milk, beef and veal, pigmeat, poultrymeat, eggs, accounting for almost two thirds of the Russian agricultural production. Statistical information are mainly based on the OECD Producer Support Estimate (PSE)[4] for Russia. Reliable statistical information are not available for the minor commodities which have not been included in the analysis. However the likely impacts on consumers, taxpayers and producers of the present Russian agricultural policy and of a CAP-like policy on such commodities can be figured out with reference to the largest groups of commodities analysed.

In chapter 2 some basic features of EU and Russian agriculture are compared in order to set a frame for the following policy analysis. The analysis of the aggregate (ten commodity groups) is then carried out for the present agricultural policy implemented in Russia, with reference to year 2003

The “CAP-like” scenario is described in chapter 3. The difference between the CAP-like scenario and the present policy scenario are outlined.

A similar approach is followed in chapter 4 where each group of commodities is analysed separately in order to describe the likely impact of the present agricultural policy and of a CAP-like policy on Russian citizens in their economic performance as agricultural producers, consumers, and taxpayers.

Both the statistical information and the applied methodology are subject to comments and criticism, which are very welcome. Our aim is to improve an approach to agricultural policy analysis sufficiently simple and correct to ease a largest understanding among policymakers of the various effects generated by government intervention in agriculture.

2. Present agricultural policy.

2.1. Some features of Russian and EU-15 agriculture

The European Union[5] and Russia are the largest economic markets in Europe. Russian population accounts for 38% of the EU-15 (Frame 1). Agricultural employment is almost the same, mainly due to the different level of development in most agricultural areas, where labour intensive techniques are still largely diffused in Russia.

Frame 1 Population and agricultural employment

The value of production of the ten commodity groups analysed is four times higher in the EU-15 (EUR 82.3 billion) than in Russia (EUR 20.5 billion). EU-15 is producing larger shares of animal products (pigmeat and poultry) while in Russia wheat and other grains show a larger share in total value of agricultural production (Frame 2 and Frame 3).

Frame 2 Value of production by commodity group

Frame 3 Share of commodity groups on total value of agricultural production

2.2. Present agricultural policy

Compared to a reference scenario without government intervention, i.e. without border protection and without subsidies to agricultural production, the impact of present Russian agricultural policy on the aggregate[6] of 10 commodity groups analysed can be outlined as follows.

(a) The border protection generates a domestic average market price support of approximately 26% the border price;

(b) direct intervention through producer payments per unit amount to 17% the border price. Both policy tools have strengthened the Russian trade balance (€ mn -3122 in year 2003), which in absence of public support would show a larger net import (€ mn -6346).

The main effects generated by such agricultural policy measures can approximately be the following (Frame 4 and appendix).

(i) The aggregate quantity produced increases by about 11%.

(ii) Farm revenues, as a consequence of the increase both of domestic prices[7] and of quantities produced, grow by 59%.

(iii) As a consequence of higher domestic prices (on average market prices are 26% higher than border prices) consumer quantities demanded decrease ( -5% ).

(iv) Aggregate consumer expenditure increases by 21%, notwithstanding the lower quantity consumed, which is offset by the higher proportional increase of market prices.

Frame 4 Russia, total 11 commodities market, year 2003

The income redistribution produced by the present Russian agricultural policy benefits producers (producer surplus is 46% of the value of production relative to the free trade scenario) and constitutes a burden for consumers (consumer surplus is reduced by 35% of the value of production relative to the free trade scenario) and taxpayers (taxpayer cost is about 14% the value of production relative to the free trade scenario).

The cost borne by consumers and taxpayers is larger than the benefit received by producers due to deadweight losses both at consumption[8] and at production level.[9]

In Frame 5 the present sources of the agricultural revenue are indicated. The value of agricultural production computed at international (border) prices is indicated in green dotted, direct budgetary subsidies to agricultural producers are indicated in yellow stripes, while the impact on producer revenue consequent to market price policies is indicated in light red. In the upper chart bars indicate the value in EUR million, while in the lower chart percentage values are indicated with reference to border prices.

According to the statistical information used, direct financial subsidies are granted almost only to animal production, in larger proportion to poultry and pigmeat, although beef, milk and eggs are substantially subsidized as well. All animal products benefit of market price support with the exception of eggs whose average market price in Russia at farm gate is lower than the comparable border price.

A similar negative market price support is apparent in the grains and oilseed market where domestic prices are lower than border prices. On the contrary sugar production is heavily supported by protecting the domestic market where the price is more than twice the border price for sugar.

Frame 5 Present sources of agricultural revenue in Russia

3. CAP-like policy

In comparison to the present 2003 situation, the implementation in Russia of CAP as recorded in EU-15 in year 2003 by the OECD would result in a higher market price support (increased by 134% of existing market price, equivalent to 162% the reference price) coupled to an increased direct support (increase by 146%, revenue per unit equal to 203% the reference price).

3.1. Effects of a CAP-like policy

CAP regime would increase farm revenues by 57% due both to higher supply prices (42% higher) and to an increased level of production (11%) in comparison to the 2003 situation; consumer expenditure would increase as a consequence of the price increase (28%) offsetting the decrease in quantity demanded (-4.8%) as a consequence of higher market prices. The disparity in the increases of quantity demanded and produced would result in a greater net trade (increase of 109%, as shown by the distance between red and blue lines intersections with the horizontal axis in Frame 4 and Frame 6).

The income redistribution produced by the introduction of the CAP regime would benefit producers (153% increase in producer surplus, equal to 115% the value of production in the free trade scenario) and constitute a burden for consumers (drop in consumer surplus by 79% the value of production in the free trade scenario) and taxpayers (taxpayer cost estimated in 51% the value of production in the free trade scenario).

Frame 6 Russia, total 11 commodities market, CAP-2003

The main impact of a CAP-like policy on the sources of farm income by commodity group are indicated in Frame 7. All commodity groups are now supported as compared to the free trade scenario.[10] Cereals and oilseed are now strongly supported by direct payments, while animal production is mainly supported by protecting the domestic market.

Frame 7 Sources of agricultural income under a CAP-like policy

3.2. Comparing the two scenarios

As compared to the present Russian agricultural policy (Frame 8), a CAP-like policy would improve the revenue of all farmers with the exception of poultry and pigmeat, where the public support would be lower. The highest increase in revenues would be enjoyed by beef and veal producers (+149% of the 2003 value of production at border prices as a consequence of increased market price support and +136% as a consequence of increased direct subsidies). Grains producers will benefit largely especially because the present low market prices will increase over the border prices, and direct subsidies will increase as well.

Frame 8 CAP-like policy applied in year 2003 vs. present Russian agricultural policy.

Frame 9 shows a quick overview of the major features of the two scenarios as affecting consumers, taxpayers, and producers. Both present and CAP-like policies would cost taxpayers and consumers.

Compared to a free trade scenario, both Russian and CAP-like policies generate net social costs, since the burden on consumers and taxpayers (and rest of EU) are not entirely offset by the extra benefit enjoyed by farmers. The dead-weight losses at production and at consumption level are rather small and are lower in the present scenario, whilst they acquire a higher weight in the CAP-like policy. On this basis, the CAP-2003 scenario is less efficient than present national policies as it generates a worst allocation of available economic resources.

Frame 9 Russia, total 11 commodities market: present scenario vs. CAP-2003

4. Analysis by commodity[11]

4.1. Wheat

4.1.1. Present situation

The present Russian agricultural policy for wheat can be reassumed in: (a) negative border protection generating a market price support per unit equal to -43% the border price; (b) direct intervention through producer payments per unit equal to 1% the border price. Both policy tools have led Russia to a position of net import (net trade in absence of public support would be 8281 thousand tons; net trade in year 2003was -1438 thousand tons).

The consequences brought about by present intervention are the following.

a) as a consequence of a supply price[12] lower than the border price, farmers gain only 50% the revenue they might get and they produce less (-15% less than the quantity they would produce in absence of public support, i.e. in a free-trade scenario); consumers spend less (36% less than in a free-trade scenario) but buy more (increase in quantity demanded in year 2003: 12%) in a free-trade scenario (market price is only 57% the border price).

Frame 10 Russia, wheat market, year 2003

The income redistribution produced by the Russian government benefits consumers (consumer surplus increases by 36% the value of production relative to the free trade scenario) and constitutes a burden for producers (-38% the value of production relative to the free trade scenario) and for taxpayers (taxpayer burden equal to 3% the value of production relative to the free trade scenario).

4.1.2. CAP-2003 scenario

In comparison to the present 2003 situation, the implementation of CAP regime as recorded in EU-15 in year 2003 by the OECD would result in a positive market price support (market price equal to 101% the reference price) but also in a very high direct support (185% the reference price).

CAP regime would increase farm revenue by 348% due not only to a higher supply price (217% higher) but also to an increased level of production (41%) in comparison to the present 2003 situation; consumer expenditure would be increased by 58% since the increase in price (77%) is likely to be higher than the decrease in quantity demanded (only -11%) resulting from a higher market price. The disparity in the increases of quantity demanded and produced would result in a net trade increase of 1248% (compare the gap between red and blue lines intersections with the horizontal axis in Frame 10 and Frame 11).

The income redistribution produced by the introduction of the CAP regime would benefit producers (extra benefit equal to 94% the value of production relative to the free trade scenario) and constitute a burden for consumers (consumer burden is increased by 1% the value of production in the free trade scenario) but especially taxpayers (taxpayer burden equal to 101% the value of production in the free trade scenario).

Frame 11 Russia, wheat market, CAP-2003

4.1.3. Comparing the two scenarios

Frame 12 allows for a quick overview of the major features of the two scenarios in our analysis: it appears clear how CAP-like policies would generate a massive transfer of economic resources from taxpayers to producers, equal to the entire value of production at border price.

Overall, both policies produce negative net social benefit, since the burden on consumers and taxpayers are not entirely offset by the extra benefit enjoyed by farmers. The dead weight losses at production and at consumption are rather little and lower in the present scenario. On this basis, CAP-2003 policies are more inefficient than present national policies.

Frame 12 Russia, wheat market: present scenario vs. CAP-2003

4.2. Maize

4.2.1. Present situation

As regards maize, present Russian agricultural policy can be reassumed in: (a) negative border protection generating a market price support per unit equal to -20% the border price; (b) direct intervention through producer payments per unit equal to 2% the border price. As a consequence, Russia has strengthened its situation of net import (net trade in absence of public support: -142 thousand tons; net trade in year 2003: -387 thousand tons).

The consequences brought about by such intervention are manifold: farmers have seen their revenues diminish (-23%) as a consequence of a low supply price (“pp” = 82% the reference price “bp”) and thanks to a decreased level of production (-6%) in comparison to the quantity they would produce in a free-trade scenario); consumers spend less (-17%) than in a free-trade scenario but buy more (5%) in comparison to the level they would request in absence of market support (market price equal to 80% the border price).

The income redistribution produced by the Russian government benefits consumers (consumer benefit increase equal to 22% the value of production relative to the free trade scenario) and constitutes a burden for producers (producer benefit decrease equal to 18% the value of production relative to the free trade scenario) and taxpayers (taxpayer burden equal to 5% the value of production relative to the free trade scenario).

Frame 13 Russia, maize market, year 2003

4.2.2. CAP-2003 scenario

In comparison to the present 2003 situation, the implementation of CAP regime as recorded in EU-15 in year 2003 by the OECD would result in a positive market price support (market price equal to 123% the reference price) but also in a rather high direct support (increase revenue per unit equal to 171% the reference price).

CAP regime would increase farm revenue by 161% due not only to a higher supply price (109% higher) but also to an increased level of production (25%) in comparison to the present 2003 situation; consumer expenditure would be diminished (41% less) since the increase in price (54%) is higher than the decrease in quantity demanded (-8% only) resulting from a higher market price. The disparity in the increases of quantity demanded and produced would result in a net trade increase of 189% (compare the gap between red and blue lines intersections with the horizontal axis in Frame 13 and Frame 14).

The income redistribution produced by the introduction of the CAP regime would benefit producers (extra benefit equal to 77% the value of production relative to the free trade scenario) and constitute a burden for consumers (consumer burden equal to 24% the value of production in the free trade scenario) and taxpayers (taxpayer burden equal to 56% the value of production in the free trade scenario).

Frame 14 Russia, maize market, CAP-2003

4.2.3. Comparing the two scenarios

Frame 15 allows for a quick overview of the major features of the two scenarios in our analysis: it appears clear how much CAP-like policies would cost to taxpayers and consumers and benefit farmers, whilst present national policies disadvantages producers and benefit consumers. Overall, both policies produce negative net social benefit, since the burden on consumers and taxpayers are not entirely offset by the extra benefit enjoyed by farmers. The dead weight losses at production and at consumption are rather little and are lower in the present scenario. On this basis, it can be affirmed that CAP-2003 policies are more inefficient than present national policies, so that present national policies should be preferred to CAP-2003 policies, although free trade policy only permits to avoid waste of economic resources.

Frame 15 Russia, maize market: present scenario vs. CAP-2003

4.3. Other grains

4.3.1. Present situation

As regards other grains, present Russian agricultural policy can be reassumed in: (a) border protection generating a negative market price support per unit equal to -54% the border price; (b) direct intervention through producer payments per unit equal to 1% the border price. This has put the country in a situation of net import (net trade in absence of public support: 8944 thousand tons; net trade in year 2003: -2306 thousand tons).

The consequences brought about by such intervention are manifold: farmers have seen their revenues diminish by -63% as a consequence of a lower supply price (“sp” = market price “mp” + producer payments per unit “pp” = 47% the reference price “bp”) in respect to a free trade scenario and thanks to a decreased level of production (-20%) than the quantity they would produce in absence of public support _free-trade scenario); consumers spend less (-47%) than in a free-trade scenario) but buy more (17%) in comparison to the level they would request in absence of market support (market price equal to 46% the border price).

The income redistribution produced by the Russian government benefits consumers (consumer benefit increase equal to 44% the value of production relative to the free trade scenario) and constitutes a burden for producers (-48%the value of production relative to the free trade scenario) and taxpayers (taxpayer burden equal to 5% the value of production relative to the free trade scenario).

Frame 16 Russia, other grains market, year 2003

4.3.2. CAP-2003 scenario

In comparison to the present 2003 situation, the implementation of CAP regime as recorded in EU-15 in year 2003 by the OECD would result in a positive market price support (market price equal to 102% the reference price but also in a very high direct support (211% the reference price).

CAP regime would increase farm revenue by 604% due not only to a higher supply price (349% higher) but also to an increased level of production (57%) in comparison to the present 2003 situation; consumer expenditure would be increased (91% more) since the increase in price (125%) is higher than the decrease in the quantity demanded (only -14.9%) resulting from a higher market price. The disparity in the increases of quantity demanded and produced would result in a net trade increase of 865% (compare the gap between red and blue lines intersections with the horizontal axis in Frame 16 and Frame 17).

The income redistribution produced by the introduction of the CAP regime would benefit producers (producer extra benefit equal to 125% the value of production relative to the free trade scenario) and constitute a burden for consumers (consumer burden equal to 2% the value of production in the free trade scenario) and taxpayers (taxpayer burden equal to 135% the value of production in the free trade scenario).

Frame 17 Russia, other grains market, CAP-2003

4.3.3. Comparing the two scenarios

Frame 18 allows for a quick overview of the major features of the two scenarios in our analysis: it appears clear how much CAP-like policies would cost to taxpayers for benefiting farmers, whilst present policies still weight on taxpayers but benefit consumers, though the transfers of economic resources are definitely lower than in the CAP-like scenario.

Overall, both policies produce negative net social benefit, since the burden on consumers and taxpayers are not entirely offset by the extra benefit enjoyed by farmers. The dead weight losses at production and at consumption are very little in the present scenario and higher in the CAP-like one. On this basis, it can be affirmed that CAP-2003 policies are more inefficient than present national policies.

Frame 18 Russia, other grains market: present scenario vs. CAP-2003

4.4. Oilseeds

4.4.1. Present situation

As regards oilseeds, present Russian agricultural policy can be reassumed in: (a) negative border protection generating a market price support per unit equal to -48% the border price; (b) direct intervention through producer payments per unit equal to 1% the border price. The situation of net export country appears to be lowered (net trade in absence of public support: 2755 thousand tons; net trade in year 2003: 1301 thousand tons).

The consequences brought about by such intervention are manifold: in comparison to the free-trade scenario farmers have seen their revenues diminish (-56%) as a consequence of a lower supply price (“sp” = market price “mp” + producer payments per unit “pp” = 53% the reference price “bp”) and of a diminished level of production (-17%); consumers spend less (-41%) but buy more (quantity demanded in year 2003: 14%) in comparison to the level they would request in absence of market support (market price equal to 52% the border price).

The income redistribution produced by the Russian government benefits consumers (consumer benefit increased by 27% the value of production relative to the free trade scenario) and taxpayers (taxpayer benefit equal to 10% the value of production relative to the free trade scenario) and constitutes a burden for producers equal to 43% the value of production relative to the free trade scenario more).

Frame 19 Russia, oilseeds market, year 2003

4.4.2. CAP-2003 scenario

In comparison to the present 2003 situation, the implementation of CAP regime as recorded in EU-15 in year 2003 by the OECD would result in the dismissal of market price support (market price equal to 100% the reference price) but also in a very high direct support (increase by 5990%, revenue per unit equal to 151% the reference price).

CAP regime would increase farm revenue by 289% due not only to a higher supply price (184% higher) but also to an increased level of production (37%) in comparison to the present 2003 situation; consumer expenditure would be increased (68%) too since the decrease in price (91%) is higher than the decrease in quantity demanded (only -12%) resulting from a lower market price.

The income redistribution produced by the introduction of the CAP regime would benefit producers (extra benefit equal to 54% the value of production relative to the free trade scenario), entirely born by taxpayers (taxpayer burden equal to 58% the value of production in the free trade scenario).

Frame 20 Russia, oilseeds market, CAP-2003

4.4.3. Comparing the two scenarios

Frame 21 allows for a quick overview of the major features of the two scenarios in our analysis: it appears clear that CAP-like and present policies generate very different flows of transfers amongst the economic actors, and that transfers of economic resources are definitely higher in the CAP-like scenario.

Overall, both policies produce negative net social benefit, since the burden on consumers and taxpayers are not entirely offset by the extra benefit enjoyed by farmers. The deadweight losses at production and at consumption are rather little and are lower in the CAP-like scenario. CAP-2003 policies would be more efficient than present national policies.

Frame 21 Russia, oilseeds market: present scenario vs. CAP-2003

4.5. Refined sugar

4.5.1. Present situation

As regards refined sugar, present Russian agricultural policy can be reassumed in: (a) border protection generating a market price support per unit equal to 125% the border price; (b) direct intervention through producer payments per unit equal to 3% the border price. Both policy tools have contributed to reduce the Russian situation of net import (net trade in absence of public support: -5213 thousand tons; net trade in year 2003: -3639 thousand tons) in the sugar market.

The consequences brought about by such intervention are manifold: farmers have seen their revenues grow by 192% as a consequence of higher supply price (“sp” = market price “mp” + producer payments per unit “pp” = 228% the reference price “bp”) and thanks to an increased level of production (28% more than the quantity they would produce in absence of public support _free-trade scenario); consumers spend more 91% more than in a free-trade scenario but buy less (quantity demanded in year 2003: -15%) in comparison to the level they would request in absence of market support (market price equal to 225% the border price).

The income redistribution produced by the Russian government benefits producers (146% the value of production relative to the free trade scenario more) and constitutes a burden for consumers (consumer benefit diminished by 443% the value of production relative to the free trade scenario) and taxpayers (taxpayer burden equal to 244% the value of production relative to the free trade scenario).

Frame 22 Russia, refined sugar market, year 2003

4.5.2. CAP-2003 scenario

In comparison to the present 2003 situation, the implementation of CAP regime as recorded in EU-15 in year 2003 by the OECD would result in a higher market price support (increase: 87%, market price equal to 334% the reference price) but also in a negative direct support (producer payments per unit equal to -66% the border price, revenue per unit equal to 268% the reference price).

CAP regime would increase farm revenue by 23% due not only to a higher supply price (17% higher) but also to an increased level of production (5%) in comparison to the present 2003 situation; consumer expenditure would be increased (37%) since the increase in price (48%) is likely to be higher than the decreased quantity demanded (only -8%) resulting from a higher market price. The disparity in the increases of quantity demanded and produced would result in a reduction of the imports of 16% (compare the gap between red and blue lines intersections with the horizontal axis in Frame 23 and Frame 22).

The income redistribution produced by the introduction of the CAP regime would benefit producers (35% more than before, extra benefit equal to 196% the value of production relative to the free trade scenario) and taxpayers (taxpayer benefit equal to 89% the value of production in the free trade scenario) and constitute a burden for consumers (consumer burden equal to 800% the value of production in the free trade scenario).

Frame 23 Russia, refined sugar market, CAP-2003

4.5.3. Comparing the two scenarios

Frame 24 allows for a quick overview of the major features of the two scenarios in our analysis: it appears clear how much CAP-like policies would generate a higher flow of transfers from consumers than present national policies. In particular, CAP-like policies would have a remarkable positive impact on the Rest of the Union, with transfers estimated to be equal to 389% the value of production at border price.

Overall, both policies produce negative net social benefit only partially offset by the Rest of the European Union, since the burden on consumers are not entirely offset by the extra benefit enjoyed by farmers, both Russian and from the Rest of the European Union. The dead weight losses at production and at consumption are rather evident and are lower in the present scenario. On this basis CAP-2003 policies are more inefficient than present national policies.

Frame 24 Russia, refined sugar market: present scenario vs. CAP-2003

4.6. Milk [13]

4.6.1. Present situation

As regards milk, present Russian agricultural policy can be reassumed in: (a) border protection generating a market price support per unit equal to 15% the border price; (b) direct intervention through producer payments per unit equal to 17% the border price. Both policy tools have reduced the Russian condition of net import (net trade in absence of public support: -8913 thousand tons; net trade in year 2003: -5142 thousand tons).

The consequences brought about by such intervention are manifold: farmers have seen their revenues grow by 44% as a consequence of higher supply price (“sp” = market price “mp” + producer payments per unit “pp” = 132% the reference price “bp”) and thanks to an increased level of production (9% more than the quantity they would produce in absence of public support _free-trade scenario); consumers spend more (12% more than in a free-trade scenario) but buy less (quantity demanded in year 2003: -3%) in comparison to the level they would request in absence of market support (market price equal to 115% the border price).

The income redistribution produced by the Russian government benefits producers (34% the value of production relative to the free trade scenario more) and constitutes a burden for consumers (consumer benefit diminished by 19% the value of production relative to the free trade scenario) and taxpayers (taxpayer burden equal to 16% the value of production relative to the free trade scenario).

Frame 25 Russia, milk market, year 2003

4.6.2. CAP-2003 scenario

In comparison to the present 2003 situation, the implementation of CAP regime as recorded in EU-15 in year 2003 by the OECD would result in a higher market price support (559%, market price equal to 198% the reference price) but also in a lower direct support (-64%, revenue per unit equal to 205% the reference price).

CAP regime would increase farm revenue (76% higher) due not only to a lower supply price (55% higher) but also to an increased level of production (14% higher) in comparison to the present 2003 situation; consumer expenditure would be increased (55%) too, since the increase in price (73% higher) is higher than the decrease in quantity demanded (only -10.3%) resulting from a higher market price. The disparity in the increases of quantity demanded and produced would result in a positive net trade (increase of 168%) (compare the gap between red and blue lines intersections with the horizontal axis in Frame 25 and Frame 26).

The income redistribution produced by the introduction of the CAP regime would benefit producers (247% than before, extra benefit equal to 117% the value of production relative to the free trade scenario) and constitute a burden for consumers (consumer burden equal to 119% the value of production in the free trade scenario) and taxpayers (taxpayer burden equal to 8% the value of production in the free trade scenario).

Frame 26 Russia, milk market, CAP-2003

4.6.3. Comparing the two scenarios

Frame 27 allows for a quick overview of the major features of the two scenarios in our analysis: it appears clear how much present policies and CAP-like policies would cost to taxpayers and consumers. Overall, both policies produce negative net social benefit, since the burden on consumers and taxpayers are not entirely offset by the extra benefit enjoyed by farmers. The dead weight losses at production and at consumption are higher in the CAP-like scenario. On this basis, it can be affirmed that CAP-2003 policies are less efficient than present national policies.

Frame 27 Russia, milk market: present scenario vs. CAP-2003

4.7. Beef and veal

4.7.1. Present situation

As regards beef and veal, present Russian agricultural policy can be reassumed in: (a) border protection generating a market price support per unit equal to 21% the border price; (b) direct intervention through producer payments per unit equal to 24% the border price. Both policy tools have permitted Russia to improve its situation of net import (net trade in absence of public support: -693 thousand tons, net trade in year 2003: -390 thousand tons).

The consequences brought about by Russian government are as follow: farmers have seen their revenues increase by 62% as a consequence of higher supply price (“sp” = market price “mp” + producer payments per unit “pp” = 145% the reference price “bp”) and increase in level of production (11.7% more than the quantity they would produce in absence of public support _free-trade scenario); consumers spend 16% more than in a free-trade scenario but buy less (quantity demanded in year 2003: -4%) in comparison to the level they would request in absence of market support (market price equal to 121% the border price).

The income redistribution produced by the Russian government benefits producers (extra benefit equal to 47% the value of production relative to the free trade scenario) and constitutes a burden for consumers (consumer benefit diminished by 29% the value of production relative to the free trade scenario) and taxpayers (taxpayer burden equal to 22% the value of production relative to the free trade scenario).

Frame 28 Russia, beef and veal market, year 2003

4.7.2. CAP-2003 scenario

In comparison to the present 2003 situation, the implementation of CAP regime as recorded in EU-15 in year 2003 by the OECD would result in a strong market price support (market price equal to 270% the reference price) but also in a very high direct support (producer payments per unit equal to 159% the border price, revenue per unit equal to 429% the reference price).

CAP regime would increase farm revenue by 310% due not only to a higher supply price (196% higher) but also to an increased level of production (39%) in comparison to the present 2003 situation; consumer expenditure would be higher (90%) too since the increase in price (123%) is likely to be higher than the decrease in quantity demanded (only -15%) resulting from a higher market price. The disparity in the increases of quantity demanded and produced would result in a net trade increase of 289% (compare the gap between red and blue lines intersections with the horizontal axis in Frame 28 and Frame 29).

The income redistribution produced by the introduction of the CAP regime would benefit producers (producer extra benefit equal to 419% the value of production relative to the free trade scenario) and constitute a burden for consumers (consumer burden equal to 214% the value of production in the free trade scenario) and taxpayers (taxpayer burden equal to 246% the value of production in the free trade scenario).

Frame 29 Russia, beef and veal market, CAP-2003

4.7.3. Comparing the two scenarios

Frame 30 allows for a quick overview of the major features of the two scenarios in our analysis: it appears clear that CAP-like policies would be an incredibly burden for Russian taxpayers, consumers and rest of European Union, whilst farmers would gain 5 times more.

Overall, CAP-like policies only produce relevant negative net social benefit, since the burden on consumers, taxpayers and rest of EU are not entirely offset by the extra benefit enjoyed by farmers. The dead weight losses at production and at consumption are rather high in the CAP-2003 scenario. On this basis CAP-2003 policies are more inefficient than present national policies.

Frame 30 Russia, beef and veal market: present scenario vs. CAP-2003

4.8. Pigmeat

4.8.1. Present situation

As regards pigmeat, present Russian agricultural policy can be reassumed in: (a) border protection generating a market price support per unit equal to 20% the border price; (b) direct intervention through producer payments per unit equal to 55.2% the border price. Both policy tools have reduced the Russian position of net import (net trade in absence of public support: -689 thousand tons; net trade in year 2003: -354 thousand tons).

The consequences brought about by such intervention are manifold: farmers have seen their revenues grow by 107% as a consequence of higher supply price (“sp” = market price “mp” + producer payments per unit “pp” = 175% the reference price “bp”) and thanks to an increased level of production (18% more than the quantity they would produce in absence of public support _free-trade scenario); consumers spend 16% more than in a free-trade scenario but buy less (quantity demanded in year 2003: -4%) in comparison to the level they would request in absence of market support (market price equal to 120% the border price).

The income redistribution produced by the Russian government benefits producers (extra benefit equal to 82% the value of production relative to the free trade scenario) and constitutes a burden for consumers (consumer benefit diminished by 29% the value of production relative to the free trade scenario) and taxpayers (taxpayer burden equal to 60% the value of production relative to the free trade scenario).

Frame 31 Russia, pigmeat market, year 2003

4.8.2. CAP-2003 scenario

In comparison to the present 2003 situation, the implementation of CAP regime as recorded in EU-15 in year 2003 by the OECD would result in a higher market price support (increase: 37%, market price equal to 127% the reference price) but also in a lower direct support (producer payments per unit equal to 4% the border price, revenue per unit equal to 131% the reference price).

CAP regime would decrease farm revenue (-31%) due not only to a lower supply price (-25% lower) but also to a decreased level of production (-8%) in comparison to the present 2003 situation; consumer expenditure would be increased (5%) since the increase in price (6%) is likely to be higher than the decrease in quantity demanded (only -1%) resulting from a higher market price. The disparity in the increases/decreases of quantity demanded and produced would result in a negative net trade increase of 32% (compare the gap between red and blue lines intersections with the horizontal axis in Frame 31 and Frame 32).

The income redistribution produced by the introduction of the CAP regime would reduce the producers benefit (-60% than before, extra benefit equal to 33% the value of production relative to the free trade scenario) and still constitute a burden for consumers (consumer burden equal to 40% the value of production in the free trade scenario) and taxpayers (taxpayer burden equal to 5% the value of production in the free trade scenario).

Frame 32 Russia, pigmeat market, CAP-2003

4.8.3. Comparing the two scenarios

Frame 33 allows for a quick overview of the major features of the two scenarios in our analysis: it appears clear that both present and CAP-like policies would cost to consumers and taxpayers for benefiting farmers of 82.0% - 32.8% the value of production at border price. Both present and CAP-like policies produce negative net social benefit, since the burden on consumers and taxpayers are not entirely offset by the extra benefit enjoyed by farmers. Dead weight losses at production and at consumption are rather little and are slightly lower in the CAP-like scenario. On this basis CAP-2003 policies are less inefficient than present national policies.

Frame 33 Russia, pigmeat market: present scenario vs. CAP-2003

4.9. Poultrymeat

4.9.1. Present situation

As regards poultrymeat, present Russian agricultural policy can be reassumed in: (a) border protection generating a market price support per unit equal to 239% the border price; (b) direct intervention through producer payments per unit equal to 513% the border price. Both policy tools have strongly reduced the Russian situation of net import (net trade in absence of public support: -2371 thousand tons; net trade in year 2003: -1242 thousand tons).

The consequences brought about by such intervention are manifold: farmers have seen their revenues grow by 1520% as a consequence of higher supply price (“sp” = market price “mp” + producer payments per unit “pp” = 852% the reference price “bp”) and thanks to an increased level of production (90% more than the quantity they would produce in absence of public support _free-trade scenario); consumers spend 165% more than in a free-trade scenario but buy less (quantity demanded in year 2003: -22%) in comparison to the level they would request in absence of market support (market price equal to 339% the border price).

The income redistribution produced by the Russian government benefits producers (extra benefit equal to 1091% the value of production relative to the free trade scenario) and constitutes a burden for consumers (consumer benefit diminished by 1130% the value of production relative to the free trade scenario) and taxpayers (taxpayer burden equal to 437% the value of production relative to the free trade scenario).

Frame 34 Russia, poultrymeat market, year 2003

4.9.2. CAP-2003 scenario

In comparison to the present 2003 situation, the implementation of CAP regime as recorded in EU-15 in year 2003 by the OECD would result in a lower market price support (-75%, market price equal to 160% the reference price) but also in a strong decrease of direct support by 101% (revenue per unit equal to 158% the reference price).

CAP regime would decrease farm revenue (-89%) due not only to a lower supply price (-81%) but also to a decreased level of production (-40%) in comparison to the present 2003 situation; consumer expenditure would be decreased (-45%) too, since the decrease in demand price (-53%) is stronger than the increase in quantity demanded (16% higher) resulting from a lower market price. The disparity in the increases of quantity demanded and produced would result in a negative net trade increase (compare the gap between red and blue lines intersections with the horizontal axis in Frame 34 and Frame 35).

The income redistribution produced by the introduction of the CAP regime would benefit producers (-94% than before, extra benefit equal to 62% the value of production relative to the free trade scenario) and taxpayers (taxpayer benefit equal to 3% the value of production in the free trade scenario) and constitute a burden for consumers (consumer burden equal to 305% the value of production in the free trade scenario).

Frame 35 Russia, poultrymeat market, CAP-2003

4.9.3. Comparing the two scenarios

Frame 36 allows for a quick overview of the major features of the two scenarios in our analysis: it appears clear that both present and CAP-like policies would cost to consumers for benefiting farmers of 1090.8% - 61.9% the value of production at border price. Both present and CAP-like policies produce negative net social benefit, since the burden on consumers and taxpayers are not entirely offset by the extra benefit enjoyed by farmers. The dead weight losses at production and at consumption are rather lower in the CAP-like scenario. On this basis, it can be affirmed that CAP-2003 policy is more efficient than present national policies.

Frame 36 Russia, poultrymeat market: present scenario vs. CAP-2003

4.10. Eggs

4.10.1. Present situation

As regards eggs, present Russian agricultural policy can be reassumed in: (a) negative border protection generating a market price support per unit equal to -29% the border price; (b) direct intervention through producer payments per unit equal to 15% the border price. Russia has become a net import country (net trade in absence of public support: 204 thousand tons; net trade in year 2003: -30 thousand tons).

The consequences brought about by such intervention are manifold: farmers have seen their revenues diminish by 18% as a consequence of a lower supply price (“sp” = market price “mp” + producer payments per unit “pp” = 85% the reference price “bp”) and of a decreased level of production (-5% than the quantity they would produce in absence of public support _free-trade scenario); consumers spend 24% less than in a free-trade scenario) but buy more (quantity demanded in year 2003: 7%) in comparison to the level they would request in absence of market support (market price equal to 71% the border price).

The income redistribution produced by the Russian government benefits consumers (consumer benefit increased by 27% the value of production relative to the free trade scenario) and constitutes a burden for producers (14% the value of production relative to the free trade scenario) and taxpayers (taxpayer burden equal to 14% the value of production relative to the free trade scenario).

Frame 37 Russia, eggs market, year 2003

4.10.2. CAP-2003 scenario

In comparison to the present 2003 situation, the implementation of CAP regime as recorded in EU-15 in year 2003 by the OECD would result in the dismissal of market price support (decrease: -100%, market price equal to 100% the reference price) but also in a little direct support (producer payments per unit equal to 2%, revenue per unit equal to 102% the reference price).

CAP regime would increase farm revenue by 25% due not only to a higher supply price (19% higher) but also to an increased level of production (5.4% more) in comparison to the present 2003 situation; consumer expenditure would be increased (32% higher) too since the increase in market price (41%) is stronger than the decrease in quantity demanded (only -7%) resulting from a higher market price.

The income redistribution produced by the introduction of the CAP regime would benefit producers (-112% than before, extra benefit equal to 2% the value of production relative to the free trade scenario) and constitute a burden for taxpayers (taxpayer burden equal to 2% the value of production in the free trade scenario).

Frame 38 Russia, eggs market, CAP-2003

4.10.3. Comparing the two scenarios

Frame 39 allows for a quick overview of the major features of the two scenarios in our analysis: it appears clear that CAP-like policies would generate much lower transfers among the economic actors. Overall, both policies produce negative net social benefit, though CAP-like ones are really low. On this basis CAP-2003 can be a good alternative to present policies.

Frame 39 Russia, eggs market: present scenario vs. CAP-2003

5. Appendix: Methodology

5.1. Price policy analysis

Policy analysts aim at describing the implications caused by intervention both on the economic actors involved: producers, consumers and taxpayers and on the entire economy, if possible allowing also for an extension of the scope of the evaluations outside the domestic market.

In order to carry out such a work, the actual situation (“present scenario”) observed in a given time period (eg: a certain level of quantity produced, demanded, a certain market price level, etc.) could be confronted to a scenario free from agricultural intervention (“free trade scenario”), created “artificially” by means of economic models enabling the policy analyst to describe the behaviour of the economic actors.

Similarly, it is possible to create a scenario under alternative policies and confront it both to the “free trade” scenario and to the “present” situation so as to anticipate the likely effects of the envisaged alternative policies.

All this has been attempted here in relation to selected agricultural commodities in Rusia. We try to analyse the effects of the present government intervention (present scenario) in year 2003 and attempt to foresee the likely effects of extending the present CAP to Russia (CAP-2003 scenario) by formulating a model based on available data and a few assumptions.

Box 1 Price definitions

The reader might face some confusion when collecting data from different sources, as sometimes they give different meaning to the same term or express the same concept through different terms. It is therefore useful to provide some basic definitions of the terms used in this paper.

Border/international/world price, reference price (OECD): the price resulting from the market forces in the international arena. It represents the opportunity cost for domestic consumers.

Demand price, producer/consumption price at farm gate (OECD), domestic/market price (Eurostat, EC DG-VI), producer price (Eurostat, EC DG-VI): the price resulting from the market forces in the domestic market at farm gate level.[14] The market price reflects the public support granted via market, i.e. through import levies, export subsidies, surplus disposal. It does not take into account the public support granted directly by means of budgetary payments. In case of no market price support and zero costs of transportation, it is equal to the international price.

Supply/producer price, basic price (Eurostat, EC DG-VI): the price resulting from public intervention, both via market and directly through payments (producer payments per unit of production). Literally, “the price received by the producer, after deduction of all taxes on products but including all subsidies on products.”[15] In case of no direct support it is equal to the market price.

The methodological framework followed here is simple and interactive allowing the policy analyst to carry out a simplified economic normative analyses[16] . The specificity of this approach relies on a limited set of primary data and on a standard partial equilibrium model. Primary data

Primary or “basic data” are selected from databases now on-line, as OECD[17] databases on Producer Support Estimates (PSEs). Together with data relative to quantity demanded (“level of consumption”) and produced (“level of production”). Estimates of support are provided by OECD consumer Nominal Protection Coefficients (NPCc) assessing the level of market price support.[18] The difference between producer Nominal Assistance Coefficients (NACp) estimating the supply price (reference price + market support per unit + producer payments per unit) and NPCc accounts for the level of direct support.

The analysis of commodity markets refers to the usual Marshallian diagram of demand and supply curves, indicating how consumer and producers respectively react to changes in commodity prices by adjusting quantities demanded and supplied.

Our partial equilibrium model does not take into account cross-elasticities, among commodities whose estimate would however be rather problematic. Prices are usually expressed as percentages of the reference price [19] and price-elasticities have been assumed equal for all commodities: 0.2 for demand and 0.3 for supply. Obviously whenever more precise commodity-specific elasticities were available the results of the model would be improved.

6. References

Albergotti T., Sabatini E. (2001) Consumer monitoring the CAP: CEECs’ Price Policy Analysis, CIPAS, University of Siena.

European Commission DG-AGRI (on line), Agriculture in the European Union – Statistical and economic information, Brussels, http://europa.eu.int/comm/agriculture/agrista/2001/table_en/index.htm

OECD (2002) Agricultural Policies in Transition Econom ies –Trends in Policies and Support, Paris

OECD (2004) Agricultural Policies in OECD Countries – Monitoring and Evaluation 2003 – Highlights, Paris

Tarditi S. (2001) Consumer Interests in the Common Agricultural Policy. Report to EU Commission, DG 24, CIPAS, University of Siena.

Tarditi S. (2003) Impact of the Common Agricultural Market Policy on Central and Eastern European Countries, Discussion Paper n°25, CIPAS, University of Siena.

[1] Organization for Economic Co-operation and Development, Paris.

[2] An outstanding example of such waste of resources are the annual payments to farmers, about EUR 1900 million (in 2001-02, WTO 2003-11-04, p. 5) for land set-aside, in order to prevent the cultivation of over 11% of EU arable land, reduce domestic supply and support farm prices.

[3] See Box 1 in the Appendix for price definitions

[4] Definitions of indicators of support used in this paper are available in OECD (2003) Agricultural Policies in OECD countries, Annex 3.

[5] Present statistical information are available for the EU-15 aggregate. We will therefore refer to EU-15 rather than to the present EU-25 aggregate, including the 10 New Member countries.

[6] Ten commodity groups: wheat, maize, other grains, oilseeds, sugar, milk, beef and veal, pigmeat, poultrymeat, eggs. (OECD (2002))

[7] With reference to Frame 4, “sp” = market price “mp” + producer payments per unit “pp” = 143% the reference price “bp”

[8] Consumers’ welfare is reduced as, as a consequence of higher prices they reduce the quantity consumed and loose the related consumer surplus (right DWL in Frame 4)

[9] Higher prices stimulate production in unfavourable conditions at higher marginal costs, worsening the allocation of economic resources between agricultural commodities and at international level. (left DWL in Frame 4)

[10] Taxes paid by sugar producer in order to implement the sugar regime (-300 EUR mn) are largely offset by the market price support granted by protecting the domestic market.

[11] For simplicity reason we do not take into consideration supply management constraints (namely land set-aside for cereals and oilseeds and milk quotas) currently implemented in the EU-15.

[12] “sp” = market price “mp” + producer payments per unit “pp” = 58% the reference price “bp”

[13] For simplicity reason we do not take into consideration supply management constraints (namely milk quotas) currently implemented in the EU-15.

[14] The farm gate price can be called (1) market price, as it originates from supply and demand and therefore it identifies at the same time the producer and consumer price; (2) domestic price, as it generated in the internal market (EU-15 or Russian market in our case).

[15] EC-DG AGRI (on line).

[16] The peculiar acronym is “SIENA.”, “Simplified Interactive Economic Normative Analysis”

[17] For some CCs (Czech Republic, Russia, Poland and Slovakia) the source is: OECD (2003) Agricultural Policies in OECD Countries – Monitoring and Evaluation 2002 – Highlights, Paris; for the other CCs (Estonia, Latvia, Lithuania, Slovenia) the source is : OECD (2003) Agricultural Policies in Emerging and Transition Economies – Monitoring and Evaluation 2002 – Highlights, Paris. Definitions of indicators of support used in this paper are available in OECD (2003) Agricultural Policies in OECD countries, Annex 3.

[18] The reference price (price in absence of support) is taken as the base (= 1)

[19] NB: Reference prices have been collected from OECD so as to compute aggregate NACp and NPCc for each single country. In this respect, they have concurred to determine the value of production of each commodity, used to weight single NACp/NPCc.