SCENAR 2020

SCENAR 2020: The Implications for Land and

Labour Markets Study for DGAgri

Income and Factor Market Implications of the 2003 CAP Reform

Martin Banse & Hans van Meijl Agricultural Economics Research Institute

(LEI, The Hague)

SCENAR 2020 Scenar 2020 Objectives

• Identification of major future trends and driving factors (baseline 1990 – projections to 2020);

• Identification major perspectives and challenges for agriculture and rural regions until 2020;

• Development of a well defined and solid baseline scenario in order to identify policy effects (with two alternative scenarios);

• Regional SWOT analysis à ‘typical’ regional reactions to the 3 scenarios.

SCENAR 2020 2020 Policy Scenarios

• Baseline: continuation of trends in long­term drivers, and pursuing current policy objectives including conclusion of the Doha Round on the basis of the EU offer on November 2005

• Regionalisation: no Doha Round, therefore bi­lateral and multi­lateral negotiations and internal market encouragement

• Liberalisation: strong move towards open markets, and no more income support

SCENAR 2020

Methodological improvements: Linking a commodity with a sectoral

approach

CLUE­s Grid

No model available: Downscaling

CAPRI NUTS II

LEITAP ESIM EU/national

LEITAP­IMAGE Global

Rest of economy Agricultural

SCENAR 2020

L _

L HORT

L pasture

L FCP

CET

σ1

L wheat L coarse grains L oilseeds

CET σ3

L sugar L COP

σ2 L OCR L NAG

Land allocation based on PEM from OECD

SCENAR 2020 Land supply curve

Agricultural Land

Average Agricultural Rental Rate

L 1

L 2

L 1 *

L 2 *

SCENAR 2020 Labour and capital market

• Wage differentials between agriculture and non­agriculture can be maintained through limited off­farm migration (e.g. De Janvry)

• Returns to assets invested in agriculture also tend to diverge from ROI in other activities

• Modelled: segmentation of the labour and capital market between agriculture and non­ agriculture – The elasticities of transformation are calibrated to fit estimates of the elasticity of labour supply from OECD (2001).

SCENAR 2020

Population, GDP, GDP per capita annual growth rates 2005­2020 = market context

­1

0

1

2

3

4

5

6

7

EU15 EU10 EU25 EU_3 HDC C&S Amer

Asia Africa

POP GDP GDP per capita

SCENAR 2020

World trade growth à potential markets: yearly growth rates 2005­2020

0

1

2

3

4

5

6

7

8

grain oils hort crops cattle oap dairy sugar agro ind ser

Base Regionalisation Liberalisation

SCENAR 2020

Sectoral structure of the economy: EU­25 2005 & 2020

0%

10%

20%

30%

40%

50%

60%

70%

80%

Crops Livestock Food Proc. Agric. + Food Proc.

Industry Services

Baseline, 2005 Baseline, 2020

SCENAR 2020

Share of Agriculture and Food Processing in GVA: EU­15 & EU­10, 2005 & 2020

0%

2%

4%

6%

8%

10%

12%

14%

16%

Crops Livestock Food Proc. Agric. + Food Proc.

EU­15 Baseline, 2005 EU­15 Baseline, 2020 EU­10 Baseline, 2005 EU­10 Baseline, 2020

SCENAR 2020

Ongoing structural change in the EU economy leads to adjustments of agricultural labour force

Sectoral employment growth, EU­15 2005à2020

­15

­10

­5

0

5

10

Baseline Regionalisation Liberalisation

Protected Other primary Tot­Agri Industries Services

SCENAR 2020

… particularly in the new Member States Sectoral employment growth, EU­10 2005à2020

­40

­35

­30

­25

­20

­15

­10

­5

0

5

10

Baseline Regionalisation Liberalisation

Protected Other primary Tot­Agri Industries Services

SCENAR 2020

The land market will have an important buffer function easing the adjustment of production …

Development real factor prices, EU­15 2005à2020

­30

­20

­10

0

10

20

30

40

Land Unskilled labour Skilled labour Capital

Base Regionalisation Liberalisation

SCENAR 2020

… but the dynamics are different in the new Member States

Development real factor prices, EU­10 2005à2020

0

10

20

30

40

50

60

70

Land Unskilled labour Skilled labour Capital

Base Regionalisation Liberalisation

SCENAR 2020

Development agricultural and non­ agricultural wages in baseline scenario in

EU­15 (market prices, 2005­2020).

0

5

10

15

20

25

30

35

Baseline agriculture Baseline non agriculture

Unskilled labour Skilled labour

SCENAR 2020

Real wages: sensitivity analysis (50% band) on the elasticity of transformation between agricultural and non­agricultural labour

4.9 4.6 Standard Dev.

3.5 2.7 Mean 4.6 3.8 Simulation result Agriculture

0.3 0.3 Standard Dev.

23.3 21.3 Mean 23.2 21.2 Simulation result

Non agriculture

Skilled labour

Unskilled labour EU15

Interval for unskilled labour ranges from ­6.5% to 11.9%.

SCENAR 2020

Technological evolution encourages production to increase …

Production of Cereals (mio t)

0

50

100

150

200

250

300

350

EU­25 EU­15 EU­10 BG&RO

2005 Baseline, 2020 Regionalisation, 2020 Liberalisation, 2020

SCENAR 2020 … although land requirements decrease …

Area sown with Cereals (mio ha)

0

10

20

30

40

50

60

EU­25 EU­15 EU­10 BG&RO

2005 Baseline, 2020 Regionalisation, 2020 Liberalisation, 2020

SCENAR 2020

… with less land used, but a high potential impact from biofuels / bioenergy demand.

Agri land use in 2020 / UAA (2005=100%)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

EU­25 EU­15 EU­10

Baseline Liberalisation Regionalisation Reg. & Fuel Directive

SCENAR 2020

The livestock sector would face significant challenges in the process of liberalisation …

Production of beef (mio t)

0

1

2

3

4

5

6

7

8

EU­25 EU­15 EU­10 BG&RO

2005 Baseline, 2020 Regionalisation, 2020 Liberalisation, 2020

SCENAR 2020

… while some (high value added) sectors would benefit from a process of liberalisation

Production of cheese (mio t)

0 1 2 3 4 5 6 7 8 9 10

EU­25 EU­15 EU­10 BG&RO

2005 Baseline, 2020 Regionalisation, 2020 Liberalisation, 2020

SCENAR 2020

Projecting the evolution of real prices: 2020 relative to 2002 (100%)

0 10 20 30 40 50 60 70 80 90 100

Cereals

Oilseeds

Other arable

Veg & perm

Beef

Pork

Sheep

Poultry

Milk

Butter

Cheese

Olive oil

2020 (Base) 2020 (Reg) 2020 (Lib)

SCENAR 2020 Agri income 2020, relative to baseline

10 to > 5 to 10 0 to 5 ­25 to 0 ­50 to ­25 ­75 to ­50 < to ­75

EU­25 EU­15

UK

Sweden

EU­10 Finland

Ireland

Malta Italy

Cyprus Greece

Slovak Rep. Spain

Slovenia Portugal

Poland France

Latvia Netherlands

Lithuania Austria

Hungary Germany

Estonia Denmark

Czech Rep. Belgium

Liberalisation Regionalisation Liberalisation Regionalisation

SCENAR 2020

Changes in farm income / ha: Regionalisation vs. Baseline

Change in Income per ha, Regionalisation vs. Baseline less than +5% +5% to +10% more than +10% not displayed

SCENAR 2020

Changes in farm income / ha: Liberalisation vs. Baseline

Change in Income per ha, Liberalisation vs. Baseline ­60% and more ­60% to ­55% ­55% to ­40% ­40% ­ ­20% ­20% ­ ­10% ­10 and less

SCENAR 2020

Trend and policy effects: number of farms 2003 / 2020

­47.1 ­29.1 ­25.4 5.3 7.5 10.0 Total

­49.1 ­39.9 ­15.3 0.6 1.0 1.2 Other livestock and crop farms

­90.3 ­18.8 ­88.1 0.1 0.1 0.8 Mixed crop farms

­75.2 ­30.4 ­64.4 0.2 0.2 0.7 Mixed livestock farms

101.3 15.5 74.3 0.7 0.6 0.4 Other animals

­62.2 ­53.0 ­19.6 0.7 1.5 1.8 Cattle activities

­25.4 ­19.1 ­7.9 2.1 2.6 2.8 Vegetables and

permanent crops

­59.6 ­35.4 ­37.4 0.9 1.4 2.3 Arable crops

Liberalisation vs. 2003

Liberalisation vs. baseline

Baseline vs. 2003 Liberalisation Baseline

Difference (%) 2020 2003 Sub­sector

SCENAR 2020

Long­term change in number of farms: baseline, 2003­2020 (%/yr)

Baseline, 2020vs. 2001 more than ­10% ­10%to ­5% ­5% to 0% 0%to 5% more than5%

SCENAR 2020

Changes in number of farms: Liberalisation scenario, 2003­2020 (%/yr)

Liberalisation, 2020vs. 2001 more than ­10% ­10%to ­5% ­5% to 0% 0%to 5% more than 5%

SCENAR 2020

Stable à increase Decline, agri­/+ Dark red

Stable à decrease Decline, agri+ Red

Stable à decrease Decline, agri­ Light red

Population development

Economic / Agri situation

Economic, agricultural and population factors determine vulnerable regions …

SCENAR 2020

Stable à increase Growth, agri­/+ Dark green

Stable à decrease Growth, agri­/+ Light green

Population development

Economic / Agri situation

…and possible winning regions.

SCENAR 2020

oilseeds + granivores

oilseeds + cereal +

arable crops + cereal +

Liberalisation Regionalisation

Agri production (ex: cereals and oilseeds) varies according to contrasting scenarios

SCENAR 2020

Challenges for agriculture as identified by the study

• Structural change process in agriculture is a long­term driver that continues with or without policy changes

• EU is facing an increasing diversity of structure and structural adjustment – Livestock sector faces important challenges and restructuring

• Alternative policy settings may not produce very different effects on the overall production but on income and farm structure – However, the regional impact may prove to be more significant

• Functioning of factor markets is crucial for adjustment process: – Segmented factor markets and the fixed factor land absorb part of the

negative impact of lower prices on production – Keeping production up, but at lower wages and land rents

• Impact of liberalization: – ò Agricultural income > ò agricultural production and land use – Reduction of border support and export refunds has a higher impact

on production than does a reduction of direct payments – Reduction of direct payments has a higher impact on agricultural

income than on agricultural production

SCENAR 2020