Zin.publikācijas

The structural changes in Latvian agricultural sector after application of CAP reform

Zinātniskā publikācija, kas publicēta šajā avotā: ##Nosaukums Possibilities for rural development in the enlarged Europe : proceedings of the International Scientific Conference "Economic Science for Rural Development" = Lauku attīstības iespējas paplašinātajā Eiropā : "Ekonomikas zinātne lauku attīstībai" starptautiskās zinātniskās konferences raksti / ##Cits nosaukums Lauku attīstības iespējas paplašinātajā Eiropā : "Ekonomikas zinātne lauku attīstībai" starptautiskās zinātniskās konferences raksti Proceedings of the International Scientific Conference "Economic Science for Rural Development" Ekonomikas zinātne lauku attīstībai : starptautiskās zinātniskās konferences raksti (2004 : Jelgava, Latvija) Izdošanas ziņas Jelgava : [b.i.], 2004 Fiziskais raksturojums 168 lpp. : il., tab. ; 30 cm. Sērija Economic Science for Rural Development ; Nr. 5 Valoda Angļu Idents ISBN : 9984576221 Europe's rural areas - an invaluable asset for us all / F. Fischler. – 11.-13.lpp. Latvian countryside in the enlarged Europe / M. Roze. – 14.-17.lpp. Living countryside as continuity from Cork to Salzburg: Latvia's case / B. Rivža, P. Rivža, M. Krūzmētra. – 18.-24.lpp. The structural changes in Latvian agricultural sector after application of CAP reform / D. Jasjko, A. Miglavs, D. Feldmans. – 25.-34.lpp.

The Structural Changes in Latvian Agricultural Sector after Application of CAP Reform

Danute Jasjko, Dr.oec., head of Policy Analysis unit, LSIAE

Andris Miglavs, Dr.oec., director, LSIAE

Dmitrijs Feldmans, assistant, LSIAE

Abstract

On June 26, 2003 the Council of Agriculture Ministers of the European Union reached an agreement on a fundamental reform of the common agricultural policy, which essentially might affect the development of Latvian agriculture and rural areas after accession. In order to evaluate possible effects of the implementation of CAP reform on Latvian agricultural sector the analytical study was made in Latvian State Institute of Agrarian economics using two different analytical tools based on economic accounts for agriculture (EAA) approach and on application of the Latvian Agricultural Simulation model (LASIM).

The present article describes the results of quantitative assessment of the CAP reform measures (mostly decoupling and the enhancing of competitiveness) and its impact on sector income and structure of agricultural production in Latvia. In addition the core of the CAP reform and its possible application in Latvia are shortly explained. The description of policy scenarios for development of Latvian agriculture as well as methodological background of economic analysis carried out are also reflected in the article.

Key words: Common Agricultural policy, CAP reform, quantitative analysis, static approach, decoupling, enhancing of competitiveness, scenarios, forecast.

1.     Introduction

On June 26, 2003 in Luxembourg the Council of Agriculture Ministers of the European Union reached an agreement on a fundamental reform of the Common Agricultural Policy (CAP), based on the Commission proposals presented on January 23, 2003. In line with the overall objectives of Agenda 2000, this reform will be introduced from 2004, completing that reform process in some areas and establishing a more stable policy framework for European agriculture.

In order to evaluate possible effect of the implementation of CAP reform on Latvian agricultural sector the analytical study was made in Latvian State Institute of Agrarian economics within the framework of the common Baltic project “EU CAP Reform: Assessment of Impact on Agrarian Sectors and rural areas in the Baltic States” [11]. The project was a unique international networking mission, initiated by the Ministers of Agriculture of all three Baltic States.

In the present article the quantitative assessment of the implementation of the CAP reform in Latvia is performed on sector level, using two different analytical tools based on economic accounts for agriculture (EAA) approach and on application of the Latvian Agricultural Simulation model (LASIM). Combination of the above mentioned analytical tools provided the analysis of the main policy changes: enhancement of the competitiveness of agricultural sector and decoupling of direct payments.

The present article consists of four main parts. Firstly the core of the CAP reform and its possible application in Latvia are explained in the beginning of article. Secondly the description of policy scenarios for development of Latvian agriculture as well as methodological background of economic analysis carried out is reflected. After that assessment of the new policy measures is given and further common prospects for development of Latvian agriculture within context of the CAP reform is provided. A few key conclusions drawn from the results of evaluation as well as the list of main references are presented in the end.

2.     The Core of CAP Reform and its application in Latvia

2.1.            The EU CAP reform

According to the viewpoint of commissioner Franz Fischler since adoption of the fundamental reform of the Common Agricultural Policy (CAP) on 26 June 2003, the “new era” has begun in the evolution of European agricultural policy.

The core of CAP reform agreement comprises application of the following main policy measures [8]:

·         Revisions to the market policy of the CAP;

·         Decoupling via introduction of single payment scheme;

·         Modulation;

·         Compulsory cross-compliance.

The market support parts of the CAP will be revised via certain set of policy measures related to institutional price cuts in the milk sector together with slight increase of compensatory payments to milk producers at the same time; excluding the rye from the intervention system; adjustments in support mechanisms in agricultural sectors producing durum wheat, starch potatoes, dried fodder, nuts; and, finally, the introduction of mechanism for financial discipline ensuring that the farm budget fixed until 2013 will not be overshot.

All these measures will serve as a political tool for enhancing the competitiveness in agricultural sector, allowing the EU producers to respond to market signals and protecting them from extreme price fluctuations at the same time.

Due to application of decoupling measure the vast majority of subsidies will be paid independently from the volume of production. For this purpose the single payment scheme should be introduced in Member States and new countries-comers, including Latvia, from 2009 at the latest. At the same time in order to avoid abandonment of production, each country may choose to maintain a limited link between subsidy and production under well-defined conditions and within clear limits. However single payment scheme will replace most of the premiums (direct aid payments to farmers) currently offered.

It is important to mention that the new support scheme should be definitely linked to application of environmental, food safety, animal and plant health and animal welfare standards, as well as to the requirement to keep all farmland in good agricultural and environmental condition (“cross-compliance”). Cross-compliance is now compulsory and all farmers receiving direct payments will be subject to cross-compliance obligations.

The distinguishing feature of the reform is that more funding will be available to farmers for environmental, quality or animal welfare programmes by implementation of modulation mechanism and reducing direct payments for larger farms by 3% in 2005, 4% in 2006 and 5% from 2007 onwards. Direct payments up to the amount of EUR 5000 per farm will remain free of reductions. However, every Member State will receive at least 80% of it modulation funds. It is also stressed that reduction of direct payments will not be applied in the accession countries until the direct payments reach the EU level.

2.2.            Application of CAP Reform in Latvia as New Member State

The CAP reform in new Member States will be implemented in line with the financial framework of the Act of Accession. New CAP reform package made significant changes to the acquis on which the accession negotiations were based. Therefore in order to adapt both the Act of Accession and the CAP reform texts before the accession the Commission has prepared a legislative proposal for a Council Decision adapting the Act of Accession to the Treaties on which the European Union is founded, following the reform of the common agricultural policy.

During the first years after accession, Latvia like other new Member States will have the option to grant direct payments in the following forms: 1) payments coupled with production (acreage or headage payments administrated under the classical scheme of IACS); 2) Single Area payments (SAP) applied to agricultural area; or 3) decoupled farm payments or single payment scheme (SPS), which can be introduced from 2005, but not later than in 2009.

Along with the official view of the Ministry of Agriculture of the Republic of Latvia [15], [16], the direct support will be administrated in the form of Single Area payments. Thereto there will be separate procedures of administration applicable for annual financial envelope coming from the EU budget (25% in 2004) and for complementary fund of national direct payments.

The EU part of direct support will be paid in a way of single area payment calculated through dividing the annual financial envelope amounted for Latvia in 2004 by the agricultural area eligible for application of the single area payment scheme.

National complementary part of direct support (financed by national budget and rural development fund) will be administrated on the ground of specific financial envelopes calculated for arable crops, fodder areas, bovine animals and ewes, starch potatoes, milk, grass and flax seeds.

Until now, the support mechanism to agriculture as well as distribution of complementary national direct payments (CNDP) among the agricultural sectors in Latvia is specified only for 2004 as the first year of accession [16].

3.     Methods and Simulation Scenarios Used for Analysis of CAP Reform in Latvia

The development perspectives of Latvian agriculture were analyzed on base of static analytical approach applying:

1.      The analysis of changes in income structure of agricultural sector using the results of the 2001 Economic Accounts for Agriculture (EAA) taken into account potential sifts in the level of input and output prices as well as support policy measures on the condition of unchanged structure of agricultural production;

2.      The static partial equilibrium econometric model for the Latvian agricultural sector (LASIM as a version of CEEC-ASIM[1] model adapted for Latvian economic situation), which projects changes in the structure of agricultural supply and demand as well as development of the sector on the basis of expecting a rational and gradual reaction of the producing entrepreneurs to changes in the economic environment, attempting to maximize their gains (profit) as well as shifts in producer and consumer surpluses and budgetary outlays.

Policy scenarios elaborated describe several possibilities for further development of Latvian agriculture and rural areas in the context of the EU enlargement and CAP reform.

In a view of all legal EC documentation it would be relevant to assume two main scenarios for quantitative assessment of CAP reform on the sector level:

·         A  (“Agenda 2000”). The scenario assumes that after year 2006 the negotiation results accepted in Copenhagen will be applied in Latvia on the basis of unchanged CAP rules from “Agenda 2000” programme. Direct payment rates will increase gradually as phasing-in rates from 65% of EU support level in 2006 to 100% - in 2010.

·         R  (the outlines of CAP reform). The scenario assumes that as early as in year 2004, according to the statements of the Council Regulation (EC) No 1782/2003 the CAP reform will be carried out in the EU, which will have the impact also on Latvia. The scenario implies more substantial drop of institutional prices for agricultural products (mostly for dairy products) and higher compensatory payments for milk and protein crops.

In the case of R scenario the level of milk prices will decrease due to intervention price cuts for butter and skimmed milk powder respectively from EUR 3282 and EUR 2055.2 per tonne in 2004 to EUR 2463.9 per tonne of butter in 2007 and to EUR 1746.9 per tone of skim milk powder in 2006.

In case of application of CAP reform the dairy premiums will be increased from EUR 5.75 to EUR 8.15 per tonne of milk produced in 2004, from EUR 11.49 to EUR 16.31 per tonne in 2005 and from EUR 17.24 per up to EUR 24.49 per tonne and onwards as a compensation to the intervention price cuts.

Crop production will be subject to changes of direct support level only due to the increase of support rate for protein crops (see Table 3.1).

According to the scenarios described above the simulations were provided for the years 2006 and 2010. The year 2001 was the base year for the calculations.

All scenarios mentioned are designed on the ground of the following assumptions:

1.      Standard direct support scheme will be implemented in Latvia after the EU enlargement for managing of the EU budgetary support.

2.      After the EU accession, the new Member States, including Latvia will supplement the EU support from national budget and partly from Rural Development fund, which means that direct support payments will be applied at the maximum allowed level (according to the Accession Treaty [7]). Therefore the EU level of direct support in the new Member Sates will be achieved already in 2010.

3.      Phasing-in rates should be applied not only to direct payments, but also to the additional payments (milk, beef) and national envelopes (sheep), stated by the Accession Treaty [7] for each country.

4.      The price level in Latvia will achieve the average EU level in 2006.

5.      In both scenarios the levels of input prices for 2006 and 2010 will increase since 2001 according to the input price change coefficients assumed:

–        Veterinary expenses                                                  1.50;

–        Electricity and energy for heating                            1.35;

–        Feeding stuffs and seeds                                          1.20;

–        Fertilisers and soil improvers                                   1.00;

–        Plant protection products and pesticides                  1.00;

–        Motor fuels and lubricants and others                      1.10.

6.      Among all rural development measures applied only implementation of LFA measures will be taken into consideration.

Table 3.1. Support levels according to scenarios A and R applicable in Latvia for the years 2006 and 2010

Indicator	Measure	Support per unit 100% Agenda 2000		Support per unit 100% CAP reform
		2006	2010	2006	2010
Field crops: wheat, rye, barley, oats, other cereals, rape, flax	EUR per tonne	63		63
Protein crops	EUR per tonne	72.5		63
Aid for protein crops	EUR per hectare	-		55.57
Dairy premium	EUR per tonne	11.49	17.24	24.49
Special beef premium	EUR per animal	210		210
Suckler cow premium	EUR per animal	200		200
Veal (1-7 months) slaughter premium	EUR per animal	50		50
Beef slaughter premium	EUR per animal	80		80
Extensification premium	EUR per animal	100		100
Sheep and goat premium	EUR per animal	21		21

Source: [1], Council Regulation (EC) No 1784/2003, [2], [6], [3], Council Regulation (EC) No 2529/2001.

Evaluation of the price effect according to scenarios described above is carried out by calculation of several price change coefficients, which are calculated on the base of institutional price shifts and which express the changes in price levels for Latvia between years 2001, 2006 and 2010.

Calculations of average EU farm gate prices on milk for year 2006 and 2010 were based on milk production technology from butter and skimmed milk powder and intervention prices for the above-mentioned products stated in Council Regulation (EC) No 1787/2003.

4.     Quantitative assessment of CAP reform effect in Latvia

4.1.            CAP reform effect on Latvian agricultural sectors as a whole

The analysis of the CAP reform implementation impact on Latvian agriculture and rural areas using EAA methodological approach is carried out taking into account two main factors: prices and direct support payments. All calculations are based on the assumptions and scenarios described in chapter 3.

In order to evaluate changes in the development of agricultural sector of Latvia as a whole before and after implementation of the CAP reform the agricultural output and structure of sector income were assessed. The structure of sector income was analysed on the base of calculation of Factor income indicator and its components as

·         Net value added at factor cost without subsidies characterizing market revenues on the sector level;

·         Direct payments (including additional payments and national envelopes) characterizing level of state support;

·         Other production related subsidies characterizing the state support to rural development through the payments to less favoured area only.

Comparison of market revenues represented by the indicator Net value added at factor cost without subsidies for the simulation years 2001 and 2006 in case of both scenarios clearly illustrates the assumption that prices in Latvia will achieve the average level of EU prices in 2006 (see Figure 4.1). The difference between market revenues in 2001 and 2006 under R scenario is EUR 88.6 million, which shows the huge gap between the price levels in Latvia and the EU.

However in order to analyse the pure reform effect it is necessary to separate it from the impact of the accession, which will be able itself to affect Latvian agriculture considerably. For that reason all further analysis was carried out comparing two scenarios simulated (“A” and “R”) as development based on unchanged CAP policy according to “Agenda 2000”priciples (A scenario) and development based on the main principles of CAP reform (R scenario).

Impact of the CAP reform implementation in 2006

Due to policy changes causing reduction of milk prices, the output of agricultural industry in the R scenario could be by EUR 23.8 million lower than the same indicator in the base scenario A (see Table 4.1).

Table 4.1. Deviations in the level of economical indicators for Latvian agricultural sector in 2006 and 2010 for R scenario compared with A scenario

Indicator	2006		2010
	EUR thou	%	EUR thou	%
Output of the agricultural 'industry'	-23 811	-3.4	14 033	2.0
Net value added at factor cost without subsidies	-30 620	-11.1	-22 309	-8.4
Direct payments (including additional payments and national envelopes)	6 808	10.7	36 342	35.9
Other production related subsidies (including LFA payments)	0	0	0	0
Factor income	-23 811	-5.6	14 033	3.1

Source: LSIAE calculations

As it is shown in Table 4.1 the net value added at factor cost without subsidies for the year 2006 in R scenario could be by EUR 30.6 million lower compared to A scenario. Such results reflect the negative effect of price cuts for milk products (such as skimmed milk powder and butter) proposed by the EC (see chapter 3).

At the same time the increase of direct payments in dairy sector by EUR 6.81 million could be insufficient to compensate the decline in the level of income from the sales of agricultural products. The decrease in market revenues of agricultural producers will cause substantial decrease in the level of Factor income by EUR 23.8 million.

However according to the results of calculations the structure of sector income will not change essentially. Because of CAP reform implementation the share of support will go up only by 1 percentage point for LFA payments, and by 3 percentage points for direct payments. The share of market revenues in Factor income will decrease by 4 percentage points due to price cuts proposed (see Figure 4.1).

Impact of the CAP reform implementation in 2010.

The changes arisen by application of CAP reform measure as enhancing of competitiveness in the year 2010 are not as remarkable as for the year 2006. Table 4.1 shows that policy reform will quite positively affect the agricultural sector of Latvia. Output of the agricultural industry could rise by EUR 14 million. According to the statements of Council Regulation (EC) No 1787/2003 after 2006 only butter will be subject to price cuts. As a result Net value added at factor cost without subsidies will fall by EUR 22.3 million, which is almost by 30% less than in 2006 (see Table 4.1).

Figure 4.1. Changes in the structure of Factor income in Latvia for the years 2006 and 2010 according to the different scenarios, thousands of EUR

 

Source: LSIAE calculations

The assumed availability of the full national envelope for Latvia due to decoupling in 2010 will cause significant growth of EUR 36.3 million in the level of direct payments, which will fully compensate the negative effect of institutional price cuts for milk products. Thus Factor income in R scenario compared with A scenario will go up by EUR 14 million and will reach almost EUR 461 million for the year 2010.

The essential increase of direct payments in 2010 due to assumption about usage of the total amount of national financial envelope, would lead to noticeable changes in Factor income structure of the agricultural sector as well. According to the results of calculations share of Net value added at factor cost without subsidies will go down by 7 percentage points but the share of direct payments would increase by the same number of percentage points.

More detailed analysis of calculations based on EAA approach proves that the CAP reform implementation in Latvia could mostly affect animal production, while crop production will remain almost unaffected. According to the results of calculations for both simulation years crop output at producer prices (does not include subsidies) will remain unchanged. At the same time animal output at producer prices could decrease by 8.3 percent in 2006 and by 6.2 percent in 2010.

Analysis of calculation results based on the EAA approach for two different scenarios in terms of sector income level gives possibility to conclude that introduction of the decoupled payment system (as might be SAP for instance) could give a sufficient positive effect to the agricultural sector of Latvia (in terms of sector income increase as well as in terms of respecting the requirements of cross-compliance) compared with maintaining of the standard scheme (A scenario), where the level of direct support is closely related with actual volumes of production.

4.2.            CAP reform effect on Latvian agricultural production structure

The price and support effects of the reform

According to the model calculations, it can be noted that an essential difference between the level of farm gate (FGP) and incentive prices will be retained for all products, which are and will be subsidized by the National government, and after accession – by the European government.

If European milk policy is not going to change (as unchanged conditions of “Agenda 2000” programme considered “A” scenario) the incentive price on milk in Latvia could be on the level of EUR 282.8 per tonne in 2006 and EUR 277.0 per tonne – in 2010 according to the calculation results.

The measures of enhancing the competitiveness in the EU dairy sector (R scenario) will be able to reduce the governmental efforts to encourage penetration of dairy products into the market (domestic and European as well). In such case, the decrease of the level of incentive prices for milk to EUR 245.5 per ton in 2006 and to EUR 241.2 – in 2010 compared to price level in A scenario, is quite indicative.

Even increasing of milk compensatory payments as early as from 2004 will not stop the decrease of level of incentive price in Europe and Latvia as well.

However, comparison of incentive price levels between A and R scenarios in the year 2010 shows quite essential reduction in level of incentive prices for CAP reform scenario practically for all products considered in the model (with the exception of pork and poultry, which are not subsidized in the EU) due to switching from direct to indirect support, like shifting from production support to producer support since 2009 at latest, and by introducing the system of decoupled income support.

Structural effect for supply and demand of Latvian agricultural products

The production and consumption volumes for 2006 and 2010 are calculated with the help of LASIM model on the basis of calibrated elasticities and forecasts of incentive and retail prices.

While certain measures of the reform will start since 2004 there will be no substantial effect on Latvian agricultural production in the year 2006. At the same time reasonably to conclude that some effects might appear in the case of Latvian dairy sector as a response to price cuts applied since 2004. However the milk quota introduced for sales of dairy products will hold up any essential changes. Latvian milk production (excluding feed requirements) will stay on unchanged level of 695.4 thousand tonnes of milk in 2006.

It is important to emphasize that if Latvian milk production would not be restricted by definite quota amount, in 2006 the production of milk could increase up to 1 million tones even in the case of R scenario. Such a rapid development of milk production is determined by growth of milk prices in Latvia after joining the EU through the introduction of European intervention mechanism in dairy sector, when Latvian farm gate prices might gradually achieve 1.8 times higher level according to A scenario and 1.5 times higher level - in R scenario versus the year 2001. That is why institutional price cuts proposed by EC in the framework of the policy reform will not affected much all Latvian dairy sectors, because of the overall milk price decrease in Europe will be accompanied by essential increase of producer prices on milk to the European level in Latvia after accession (see Figure 4.2).

Figure 4.2. Development of procurement price on milk in Latvia after accession for the years 2006 and 2010, EUR/t	Figure 4.3. Structural changes in Latvian meat production in 2001, 2006 and 2010 according to different scenarios, %
Source: Agriculture of Latvia 2003, p.45; assumptions of LSIAE	Source: LSIAE calculations

At the same time restriction of milk production by quota might reduce the number of Latvian actors playing their roles on the domestic and European dairy markets, and/or affect the domestic price level for milk. For instance, modelling calculations show that introduction of milk quota in Latvia on the level of 695.4 thousand tonnes in 2006 might essentially reduce the level of incentive price on milk – 2 and 2.3 times less for R and A scenarios correspondingly.

At the same time, reduction of milk price proposed by the European Commission will have a positive effect on consumption of dairy products, by increasing their demand from 671.6 thousand tonnes in A scenario to 679.3 in R scenario, in 2006.

Figure 4.4. Structural changes in Latvian agricultural production in 2001, 2006 and 2010 according to different scenarios, %

Source: LSIAE calculations

RAO: rest of agricultural output

Consequently, due to higher demand for milk products on the domestic market, the export of Latvian dairy products could be 7.6 thousand tonnes lower in R scenario compared to A scenario, in 2006.

Decoupling of direct support from the production might have a different impact upon the development of various sectors of agricultural production. The simulations for the year 2010 mostly describe the effect of decoupling of the EU income support by changes in the level of incentive price, which is going to be lower in R scenario compared to the situation when “Agenda 2000” will be still in force.

Figure 4.4 reflects the possible changes in the production structure of Latvian agricultural sector on various stages of CAP reform. As is shown, the share of milk production in Latvian agriculture is going to decrease slightly due to price reductions assumed during the period from 2004 to 2007. Latvian milk production will remain within the quota limits, which might increase after 2007 by 33 thousand tonnes (to the level of 728 thousand tonnes) according to the negotiation results. However, even in case of quota increase, the share of milk production will go down in R scenario for 2010.

Shares of all other agricultural sectors (as cereals, technical crops, meat production and the rest of agricultural output in general) will gradually increase in 2006 and 2010.

While the cereal production will increase substantially after accession (by 1.27 times for both accession scenarios – A and R), the share of wheat and other types of grain in cereal production will become larger in the case of R scenario.

In the Latvian meat sector, production of beef is going to decrease by 10% compared to A scenario in 2010. This is the most sensitive sector to CAP changes among all other branches of Latvian agriculture (see Figure 4.3). Decoupling of support in agriculture may affect the increase of pork production by 7% in 2010. At the same time production of poultry meat and mutton in R scenario will be almost on the level of A scenario, taking into account that poultry and pork production will increase correspondingly by 1.7 and 1.15 times after accession.

While the levels of incentive prices among A and R scenarios differ significantly there is no any essential variations in level of retail prices between the scenarios mentioned, except for milk prices with levels of EUR 467.3 per tonne for A scenario and EUR 434.7 per tonne for R scenario in 2010. For that reason the demand calculated on the main agricultural and food products is nearly the same in both scenarios for the year 2010.

Analysing the Latvian foreign trade flows it is important to conclude that Latvia will still remain as a the net importer of beef in R scenario (although on the level of 70 tonnes only) against to A scenario when it would be possible even to export the beef in amount of 2.2 thousand tonnes.

Besides, import of pork and poultry meat will decrease gradually after accession. The export amount of dairy products will be lower in R scenario (46.12 thousand tonnes) compared with A one (51.69 thousand tonnes) due to higher level of domestic consumption in 2010.

The changes in the level of welfare

Assessment of the effect of the reform on different interest groups of society – such as producers and consumers, enables to conclude that consumers will definitely gain in the case of reform against the agricultural producers, who might be the losers.

Because of substantial drop of institutional prices in the milk production sector during the period from 2004 to 2007, the revenues of producers will become less by EUR 25 million  in 2006 and by EUR 20 million less in 2010 compared to “Agenda 2000” scenario (see Table 4.2). Growth of compensatory payments to milk producers will not be able to stop declining of their surpluses even before the decoupled system of payments will be introduced in the Community.

At the same time, price reductions proposed by the European Commission will save consumers’ spending in Latvia at EUR 29.9 million in 2006 and EUR 22 million in 2010.

Table 4.2. Deviations of Latvian welfare level in R scenario compared with A scenario, EUR million

The type of indicator	2006	2010
Producer surplus	-25.3	-20.0
Consumer surplus	29.9	21.8
Budget outlays	-5.2	1.3
Total welfare	-0.6	3

Source: LSIAE calculations

Budget expenditures for support to agriculture as well as outlays to cover the gap between the level of world and domestic prices (in the form of export subsidies) for products exported, might be reduced in long-term perspective due to changes in the structures of export and production among A and R scenario.

Thus in the case of implementation of CAP reform, the total welfare effect, distributed among producers, consumers and governmental budget (national or European after accession) might become positive in the year 2010 due to structural changes in Latvian agriculture after accession.

5.     Some important conclusions about application of CAP reform in Latvia

Quantitative analysis of CAP reform, which gradually will be implemented in Latvian agricultural sectors since the accession gives possibility to come to some conclusions about perspectives for development of Latvian agriculture and rural areas. The implementation of idea of decoupling makes the reform really fundamental, giving the farmers freedom to produce what the market wants. The achieved analytical results base on methods applied and policy scenarios described above have become the basis for some conclusions:

1)      Evaluating the impact of CAP reform, which will come in force from 2004 in all Member States including Latvia, it is important to emphasize that the core of the reform is to increase significantly the effectiveness of the income aid while the actual amounts of support paid to farmers will remain unchanged, which would mean for the new Member States - within the national envelopes agreed during the accession negotiations. At the same time, introduction of new support schemes, such as single area payments or single farm payments should be conditional on cross-compliance with environmental, food safety, animal health and welfare, as well as the maintenance of the farm in good agricultural and environmental conditions.

2)      Comparing the current level of producer prices on raw milk in Latvia with the corresponding price level in the EU it is possible to conclude that gradual reduction of intervention prices for butter and skimmed milk powder set by the Council Regulation (EC) No 1787/2003 will not affect much Latvian milk production particularly during the first years of membership in the EU. This is because the overall milk price decrease in Europe due to implementation of CAP reform will be accompanied by essential increase of producer prices on milk to the European level in Latvia after accession. However, it is necessary to emphasise that general increase of milk prices after accession will be relevant only under the fulfilment of the obligations referred to the cross-compliance with environmental, food safety, animal health and welfare, as well as the maintenance of the farm in good agricultural and environmental conditions.

3)      The milk price increase after accession will be able to foster the development of dairy sectors in Latvia. However, further increase of milk production within the all quality restriction will be limited by total milk quota set on the amount of raw milk sales for each country. Thus after joining the EU, the expected increase of prices on milk and dairy products in Latvia with simultaneous introduction of milk quota will not change essentially the structure of agricultural production.

4)      Compared to the unchanged conditions of Common Agricultural Policy, Latvian agricultural sector could lose EUR 30.6 million and EUR 22.3 million in the years 2006 and 2010 correspondingly because of reduction in milk price level. While the increase of milk compensatory payments since 2004 will take place in the new Member States, the phasing-in rates until 2013 will be attributed to such compensations. As a result, new (increased according to the EC Regulation No 1787/2003) phased-in milk payments will not compensate the gradual decrease of market revenues for milk producers due to institutional price cuts in case of the reform.

5)      Analysis of decoupling effect shows that less support impact on the production could negatively affect the production of beef in Latvia. While the volume of agricultural production could increase essentially after accession due to the efficiency increase, the growth in beef production in Latvia could be significantly less compared to other agricultural sectors. Comparing with the conditions of “Agenda 2000” programme, Latvian production of beef could even decrease by 9.2% in 2010. Shares of all other agricultural sectors (as cereals, technical crops, meat production and the rest of agricultural output in general) will gradually increase in 2006 and 2010.

6)      Decoupling of support in agriculture may affect the increase of pork production by 7% in 2010. At the same time production of poultry meat and mutton in case of reform might not be changed much, taking into account that poultry and pork production will increase correspondingly by 1.7 and 1.15 times after accession. In total Latvia will remain the net importer of all types of meat including the beef as well.

References

1.      Council Regulation (EEC) No 1253/99 on the common organization of the market in cereals

2.      Council Regulation (EC) No 1255/1999 of 17 May 1999 on the common organisation of the market in milk and milk products

3.      Council Regulation (EC) No 1254/1999 of 17 May 1999 on the common organisation of the market in beef and veal

4.      Council Regulation (EC) No 2529/2001 of 19 December 2001 on the common organisation of the market in sheepmeat and goatmeat

5.      Council Regulation (EC) No 1782/2003 of 29 September 2003 establishing common rules for direct support schemes under the common agricultural policy and establishing certain support schemes for farmers and amending Regulations (EEC) No 2019/93, (EC) No 1452/2001, (EC) No 1453/2001, (EC) No 1454/2001, (EC) 1868/94, (EC) No 1251/1999, (EC) No 1254/1999, (EC) No 1673/2000, (EEC) No 2358/71 and (EC) No 2529/2001

6.      Council Regulation (EC) No 1787/2003 of 29 September 2003 amending Regulation (EC) No 1255/1999 on the common organisation of the market in milk and milk products

7.      Treaty of Accession (http://www.am.gov.lv/lv/?id=3777)

8.      European Commission Directorate-General for Agriculture. Newsletter Special Edition July 2003. CAP reform summary: http://europa.eu.int/comm/agriculture/publi/newsletter/capreform/special_en.pdf

9.      CSB. Monthly Bulletin of Latvian Statistics 05, 2003. - Riga, 2003

10.  CSB. Results of the 2001 Agricultural Census in Latvia. - Riga, 2003– pp.416

11.  EU CAP Reform: Assessment of Impact on Agrarian Sectors and rural areas in the Baltic States. Analytical report.-Riga.:LSIAE, 2004 – pp.121

12.  LR Ministry of Agriculture. Application of State Support to the Agricultural Development in 2002. – Riga, 2002 – pp 121

13.  LR Ministry of Agriculture. Rural Development Plan for Latvia for Implementation of Rural Development Program 2004-2006. Riga, 2003 – pp. 85

14.  LR Ministry of Agriculture. Draft Law “On Agriculture and Rural development” (draft prepared on 19.06.2003).

15.  LR Ministry of Agriculture. The draft of “Papildus valsts tiešo maksājumu ieviešanas kārtība Latvijā“, pp. 33 (version prepared on 19.01.2004)

16.  LR Ministry of Agriculture. The draft of “Vienotā platības maksājuma ieviešanas kārtība Latvijā“, pp. 7 (version prepared on 19.01.2004).