parlons I I

g rapn by watt Thompson I q u es & Gregoire Tdard

Consumption versus Demand -iR

4 hasty reader looking at Figure 1 could conclude that UK beef demand recovered from the BSE crisis, which began in 1996, as early as 1999. But did it really? The answer lies in the difference between beef consumption, i.e. the amount people buy, and demand, i.e. the relationship between consumption and factors such as incomes and prices. Taking this difference into account, the data reveal another story.. .

Let’s look at Figure 2 . Following the BSE outbreak, many consumers bought less beef - this demand shift meant that people were not willing to buy as much beef at any given price. But at the same time, beef prices fell dramatically, so those who were willing to eat beef had an incentive to buy more of it. This reduced the impact of falling demand on Consumption; so the consumption change was less than the demand shift.

Knowledge of the demand relation- ship can be used to estimate levels of beef consumption if the BSE crisis bad not The dark blue column in Figure 3 shows how much beef UK consumers would have purchased at these lower prices

assuming that they had not been discouraged by BSE.

Looking at 1996, the reduction in the amount consumers purchased because of the onset of the BSE crisis was around 26 per cent. In 2000, the reduction was still 9 per cent. UK demand seems to have recovered by 2001, with the reduction due to BSE only about 1 per cent.

At the end of 1999, BSE was discovered in several other EU Members, leading to a similar shock to continental beef demand as in the UK. Again, this demand shift was seen both in lower consumption and in falling prices.

Figure 4 shows actual beef consumption during the BSE crisis in the EU. The dark blue column gives an estimate of what beef consumption levels would have been if the BSE crisis had not occurred, based on the lower beef prices seen in the EU.

We estimate a 22 per cent reduction in EU beef demand due to BSE in 2001, the most recent year with reliable data. However, it is difficult to know what is in store for the EU beef markets. No one knows how quickly or slowly demand will recover.

Economic terms can be confusing: sometimes the terms ‘consumption’ and ‘demand’ are used as though

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d - Recovery after BSE? they mean the same thing. But looking at Figure 1 and concluding that the effects of the UK BSE crisis on demand ended as early as 1'999 is incorrect, because it ignores the impact that lower demand can have on prices even after consumption recovers. We see in Figures 3 and 4 that the crisis in consumer confidence in beef was longer-lasting and more serious than the quantity consumed d o n e would lead us to believe.

So we must be careful when we discuss the effects of BSE. Lf people in government or business do not have clear information about whether or not the BSE crisis has ended, they may implement flawed policy or business strategies. Public or industry-sponsored efforts to assure consumers o f the safety o f beef might be terminated prematurely or might not be undertaken at all if people believe that demand is the same a s consumption.?

lDeniand elasticirles are from the OECD's AGLINK niixlel o f EU beef demand. and not o f the IiK alone. The exact sizes o f the shifts depend very much on the elaqticities used zFor more infoi-niation. hee the section on BSE in the OECLI &nculturd Outlook 200.2 - -7007

Wyatt Thompson and Gregoire Tallard OECD, Paris. Wyatt Thompson is currently a recipient of a Japan Society for the Promotion of Science Fellowship, hosted by the Policy Research Institute, Ministry of Agriculture, Forestry and Fisheries. Email: wyatt@prinuzffaffrc.go.jp

Gregoire. Tallard@oecd. org

The views e.xpressed are those of the authors and may not necessarily be shared by these organisations.

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HE 1990s witnessed widespread T changes in farm structures, government policies and agricultural markets in the Central and East European Countries (CEECs) which are applicants for EU membership. These changes have resulted in a more differentiated set of farming systems that have to deal with the effects of international trade liberali- sation and, on accession, a reformed CAP which is likely to offer much less protection than previous new entrants enjoyed. This has raised the questions of, first, how internationally competitive is CEEC agriculture and, second, how does competitiveness vary between countries and farm structures?

Competitiveness is a term that has aroused many debates but little consensus. While some would deny its usefulness (Krugman, 1994) others have attempted to quantify

the study of competitiveness: the analysis of trade flows, ratios based on accounting procedures and measures of variations in productivity and efficiency (Eiteljorge and Hartmann, 1999; Pouliquen, 2001). One of the most common accounting approaches has been the estimation of domestic resource cost (DRC) ratios (see Box 1) and the results of these studies are discussed here. DRCs have been widely used in the analysis of CEEC agricultural policy as they provide a framework for evaluating the profitability of commodity production under different prices, exchange rates and technical coefficients. The application of the DRC methodology to individual cases, however, requires a number of assumptions and a more detailed review of problems and results are presented in Gorton and Davidova (2001).

measures that provide a basis for characterising competitive advantage and disadvantage. In these studies, competitive advantage is seen to depend on either (or a combination of) price competitiveness and product quality. In the former case, long run advantage depends on securing a lower comparative cost structure. A differential strategy based on product quality will be successful where customers are willing to pay a premium for higher or more uniform quality, branding or service (Porter, 1990).

In relation to agriculture in the CEECs, economists have broadly followed one of three approaches to

KEY FINDINGS Arable sector Drawing together nine studies on Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovakia and Slovenia, we can say that, overall, the arable sector in the CEECs tends to be more internationally competitive than livestock production. In 76 per cent of the reported cases DRCs are less than one, indicating international competitiveness. If one compares livestock with arable production, a clear distinction is evident. Out of 56 cases in the livestock sector, only 7 instances of DRCs below 1 are reported. Table 1 presents DRCs for the last year for which they were

The most competiti south of the region ... m com petit ive.

larger, arable producers in the production is not internationally

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available. I t shows that with a few exceptions, such as wheat in Slovenia and sugar beet in Slovakia, DRCs for crop production were below 1, indicating international cornpetitive- ness.

Within the arable sector, the most competitive crops were wheat and oilseeds (rapeseed in the north and sunflower seeds in the south). Wheat producers benefited from compara- tively high international prices during the mid-l990s, especially in 1996. In this year, DRCs for wheat production were less than 1 for Bulgaria, the Czech Republic, Hungary, Slovakia and Romania. After 1996, the advantage was less pronounced as falling international prices reduced the measured competitiveness of CEEC grain production by making the traded crop output less valuable. However, this increased the competi- tiveness of livestock production by reducing the feed costs. The private profitability of cereal production has

Box 1: The domestic resource cost (DRC) ratio

The DRC compares the opportunity costs of domestic production to the value added it generates (Tsakok, 1990). It makes a distinction between tradable inputs i.e. that can be exported or imported, and non-tradable inputs i.e. that are not subject to international trade. The numerator is the costs of using domestic primary resources - land, labour and capital (non- internationally traded inputs) per unit of output valued in terms of shadow prices, that is the value they can obtain in the next best use. The denominator is the value-added (value of output per unit minus tradable input costs per unit of output) in border prices that are adjusted back to the farm level. The free-on-board (f.o.bJ border price is chosen if a country is a net exporter, while a price including cost, insurance, freight (c.i.f.) is chosen for a net importer, on the basis that these prices represent the opportunity cost to the producers and consumers of the country in question. These border prices are adjusted back to the farm level by taking into account transport, storage and other costs between an ‘average’ farm and the border. When the DRC is smaller than 1, domestic production is efficient and internationally competitive, because the opportunity cost of domestic resources is smaller than the net foreign exchange it gains in exports or saves by substituting for imports. The opposite is true when the DRC is larger than 1. However, it should be noted that DRCs are sensitive to the choice of shadow prices for non-tradable inputs and to the choice of and changes in exchange rates and international prices.

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also tended to fall since the mid- 1990s.

Sunflower production was competi- tive in all years analysed for Hungary, Slovakia and Romania. Due to climatic conditions and increasing private profitability, the production area devoted to sunflower has grown in all three countries. This indicates a degree of responsiveness to changes in the operating environment of

farmers. Sugar beet production requires substantial protection as it is uncompetitive against imports of sugar derived from cane.

While DRCs have shown that, by and large, arable production was competitive, there are indications that in Bulgaria, Hungary and Romania producers are paying above world market levels for their tradable inputs. Privatisation of seed, fertiliser

and plant protection chemicals has been comparatively slow in Bulgaria and Romania and tariffs on these products are significant throughout the region. If farmers are expected to operate in a low-subsidy environment without price support, it is essential that inputs should be available at internationally competitive prices.

For estimates of the future competi- tiveness of crop production it should be noted that, during the first decade of transition, CEECs used mainly low input-low output farming systems. Their ability to stabilise or increase yields in the future will depend on whether farmers can use inputs more efficiently and on whether they will be able to afford these inputs (EC, 2001).

Livestock production Turning to animal production, we can see that the performance has been much worse. With only one exception the DRCs for beef and milk production were all greater than 1. Relatively low international prices, high labour and feed use, low productive breeds, as well as fragmented production have all contributed to this situation. Beef production, for example, is mainly dependent on the dairy herd, as the size of the suckler cow herd is very small, and the number of dairy COWS

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in the CEECs decreased from more than 10 million in 1992 to 7.3 million in 2000 (EC, 2001). Feed is often of low quality resulting in a low feed to meat conversion ratio. At the beginning of transition the large herds maintained by state and co- operative farms were often broken up and either distributed to members

grandes cultures les plus importants du sud de la region.. . une bonne partie de la production animale n’est pas competitive sur le plan international.

or directly slaughtered. This J J was one of the reasons for the significant decrease in the stock of animals and for fragmentation of production: in Romania and Bulgaria the average dairy herd size is less than 2 cows. As a result, the sector has been plagued by high transaction (buying and selling) costs, unrealised economies of scale and an erratic and poor quality of supply Even with the removal of price and budgetary supports in both countries, domestic milk prices are high by international standards but private profitability is low or negative. In Hungary and the Czech Republic the situation has been better due to higher real incomes and the attraction of greater levels of foreign direct investment (FDI) in the dairy sector. In these countries foreign owned dairies have provided investment credits and other support to larger dairy farmers to help ensure regular supplies. The results for pork production reflect the fluctuations in international pig prices and changes in supply brought about by shifts in the input/output price ratio. Overall, the situation for pork in the region is better than for milk and beef, as less fragmentation of production has occurred.

Variations in competitiveness between countries and farm types Substantial variations are evident between countries. Very little of Slovenia’s agricultural output is internationally competitive. In this case production is hampered by unfavourable natural conditions, fragmented farm structures and the relatively high costs of domestic factors of production (especially labour). Bulgaria and Romania have much more favourable natural conditions for arable farming than more northern CEECs such as the Baltic States but have suffered in the past from macroeconomic instability and a lack of appropriate infrastruc- ture for agricultural marketing.

Analysis by farm types and sizes indicates the importance of management form and economies of scale. In the Czech Republic co- operatives have tended to perform better than farming companies. Part of the reason is the larger average size (2,500 hectares) of co-operatives in the Czech Republic and their historical importance. Farming companies were relatively new and were formed with a poorer asset base. Larger family farms (i.e. above 50 hectares) performed better than their smaller counterparts in the production of arable crops. In Hungary, as in the Czech Republic, larger corporate farms (farming companies and producer co- operatives) are more internationally competitive than smaller family farms in crop production. The larger corporate farms use a lower proportion of non-traded inputs (labour and land) per unit of tradable costs than family farms, which

Suden der Region auf.. . ein groOer Teil der Tierproduktion ist international nicht

7 7 wettbewerbsfahig .

reduces their DRCs (Banse et al. 1999). However, this pattern is sensitive to the shadow cost of land adopted.

The Polish results reveal that smaller farms are less competitive than the larger farms and this holds for all commodities and all years. This is an important result as Polish production is relatively fragmented and the degree of structural change has been slow. For example, 32 per cent and 41 per cent of the Polish wheat and rye crop are grown on farms of less than 10 hectares respectively. These small farms have a long-standing history in Poland. In contrast to most of the other CEECs, Polish agriculture has never been fully collectivised. At the outset of transition private farms occupied 77 per cent of agricultural area and employed 80 per cent of the total farm labour.

Competitiveness and the EU As explained in Box 1, the denominator of the DRC ratio is the value-added, per unit of output, measured in border prices and adjusted back to the farm level. The results presented above are indicators of the ability of domestic producers to be profitable against these prices, which reflect world market conditions. Some commenta-

tors have questioned the reliance on border prices as the main benchmark. It has been argued that studies should also consider the ability of CEEC producers to operate at EU tradable input and output prices, especially in the wake of accession negotiations. Where this adjustment has been made, results indicate that the CEECs would be more price competitive, although this is not universally true. For example, pork producers would tend to be

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competitive there is a need to be commodity, country and farm type specific. Overall, the most competi- tive farms are larger, arable producers in the south of the region. Much livestock production in the region is not internationally competitive and private profitability has been low. Many enterprises have responded t o falls in private margins by reducing the use of tradable inputs. Although this may be rational in the short- term, competitiveness can only be improved in the longer-term by other means. These include better access to and use of international markets t o improve technology and quality of inputs, amalgamation o f farm units and encouraging the establishment of appropriate marketing organisations to increase value-added and guide the improvement of output mixes.

worse off under EU conditions as feed costs would be higher, without a similar rise in output prices.

Out of the 18 cases studied for competitiveness under EU tradable prices, there are only 10 that are uncompetitive. In the Bulgarian and Czech analyses there are only two cases (milk in Bulgaria for 1995 and beef production in the Czech Republic in 1996) where DRCs above 1 have been recorded. In Hungary the situation is less clear, as while producers would benefit from belonging to the EU in terms o f higher average output prices, in some cases this would be more than offset by higher tradable input prices.

Two caveats, however, should be noted. First, these estimates assume that quality is homogenous. N o adjustments were made for differences in standards between the CEECs and the existing EU members. Second, direct payments have not been taken into account. If direct payments were available (i.e. not only price alignment, but also policy harmonisation between the CEECs and the EU is assumed), then, for example, the lack of profitability reported for Hungarian wheat and barley production in some years would have been reversed.

Overall Assessment In answering the question of whether CEEC agriculture is internationally

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summarv Is Agriculture in the CEECs internationally competitive?

With on-going debates over CAP reform and future accession to the

EU, the competitiveness of agricultural production in the Central and East European Countries (CEECs) has become a major issue. This article sumniarises the key findings of empirical work conducted by the authors and other studies that have estimated the competitiveness of agriculture in seven CEECs. We find that, in general, CEEC crop production is more internationally competitive than livestock farming. During the mid-l990s, for example, most arable production in the region was internationally competitive but during the same period, milk production was not internationally competitive. There is, however, a considerable degree of variation from country to country; very little of Slovenia‘s agricultural production, for example, is internationally competi- tive. In the livestock sector the greatest problems lie where large herds have been broken up resulting in fragmented production. This has particularly affected beef and milk production. We found variations in competitiveness by farm size and farm type. Larger corporate farms in Hungary and the Czech Republic, for example, are more internationally competitive in crop production than the smaller family farms. In general we find that if CEEC producers faced average EU prices for their traded inputs and outputs, most could be price competitive.

L‘Agriculture des pays D’Europe centrale et o r i en t a I e (Peco) es t - e I I e competitive sur le plan international?

Avec les debats actuels sur la reforme de la PAC et I’accession

future des pays &Europe centrale et orientale (PECO) a 1’Union Europkenne, la competitivitk de leur production agricole est devenue un probleme majeur. Cet article resume les principaux resultats de travaux empiriques effectues par les auteurs et ceux d’autres etudes qui ont evalue la competitivite de I’agriculture dans sept pays d’Europe centrale et orientale. Nous constatons qu’en general, les produits vegetaux des PECO sont plus competitifs que I’elevage sur le plan international. Au milieu des annees 90, par exemple, la plupart des productions vegetales de la region etait competitives sur les marches mondiaux, ce qui n’etait pas le cas de la production laitiere durant la m5me periode. I1 existe, cependant, des variations considerables d’un pays a I’autre ; une toute petite partie de la production agricole de Slovinie, par exemple, est competitive a l’international. Dans le secteur de I’elevage, les plus gros problemes resident dans le fait que les grands troupeaux ont ete disperses, entrainant la fragmentation de la production. Ceci a affecte en particulier la production de bceuf et de lait. Nous constatons des variations de competitivite par taille et type d’exploitation. Les grandes exploitations societaires de Hongrie et de Rkpublique tcheque, par exemple, sont plus compktitives sur le plan international pour les productions vkgetales que les petites fermes familiales. Globalement, nous constatons que si les producteurs des PECO etaient confrontes aux prix moyens europeens pour leurs importations et exportations, la plupart pourraient Ctre competitifs en termes de prix.

Kann die Landwirtschaft der MOEL im interna- tionalen Wettbewerb bestehen?

In den aktuellen Debatten uber die 9 Reform der GAP und die Osterweit- erung der EU ist die Wettbewerbsfahigkeit der landwirtschaftlichen Produktion in den mittel- und osteuropaischen bndern (MOEL) zu einem zentralen Thema geworden. In diesem Artikel werden die bedeutendsten Ergebnisse der empirischen Untersuchungen der Autoren und weiterer Studien zusammengefasst, welche Schatzungen uber die landwirtschaftliche Wettbewerbs- fahigkeit von sieben MOEL vorgenommen haben. Unserer Ansicht nach ist in den MOEL im allgemeinen der kreich des Pflanzenbaus international wettbewerbs- fhiger als der Bereich der Viehhaltung. Mitte der Neunziger Jahre beispielsweise war der uberwiegende Teil des Ackerbaus aus der Region international wettbewerbs- fahig, wahrend dies auf die Milchproduktion zu dem selben Zeitpunkt nicht zutraf. Jedoch variien die Wettbewerbsfhigkeit in hohem Malie von Land zu Land; so ist beispielsweise nur ein geringer Anteil der landwirt- schaftlichen Produktion Sloweniens international wettbewerbsfahig. In der Viehhaltung bestehen die grogten Probleme dort, wo groge Bestande aufgeteilt wurden, wodurch sich eine fragmentierte Produktionsstruktur ergab. Dies trifft insbesondere auf die Rindfleisch- und Milchproduktion zu. Wir stellten eine variierende Wettbewerbs- fahigkeit je nach ktriebsgriiMe und-typ fest. Grogere Unternehmen mit gesellschaftlicher Rechtsform in Ungam und der Tschechischen Republik beispiel- sweise weisen im Bereich des Ackerbaus eine hohere internationale Wettbewerbs- fahigkeit auf als kleinere Familienbetriebe. Im allgemeinen sind wir der Ansicht, dass der uberwiegende Teil der Erzeuger in den MOEL in Bezug auf den Preis wettbe- werbsfihig ware, wenn fix die handelbaren Produktionsfaktoren und Produkte durchschnittliche EU-Preise gelten wurden.

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