To Subsidize or Not to Subsidize Private Storage? Evaluation of the Effects of Private Storage Subsidies as an Instrument to Stabilize Agricultural Markets After CAP Reforms

Agricultural and Food Policy,

A meta-analysis of the price and income elasticities of food demand

Food demand elasticities are crucial parameters in the calibration of simulation models used to assess the impacts of political reforms or to analyse long-term projections, notably in agricultural sectors. Numerous estimates of these parameters are now available in the economic literature. The main objectives of this work are twofold: we seek first to identify general patterns characterizing the demand elasticities of food products and second to identify the main sources of heterogeneity between the elasticity estimates available in the literature. To achieve these objectives, we conduct a broad literature review of food demand elasticity estimates and perform a meta-regression analysis.Our results reveal the important impacts of income levels on income and price elasticities both at the country (gross domestic product-GDP) and household levels: the higher the income is, the lower the level of elasticities. Food demand responses to changes in income and prices appear to follow different patterns depending on the global regions involved apart from any income level consideration. From a methodological viewpoint, the functional forms used to represent food demand are found to significantly affect elasticity estimates. This result sheds light on the importance of the specification of demand functions, and particularly of their flexibility, in simulation models.Les élasticités prix et revenu de la demande de biens alimentaires sont des paramètres cruciaux intervenant dans le calibrage des modèles de simulation qui sont utilisés pour évaluer l’impact de réformes politiques ou faire des projections de long terme, notamment en ce qui concerne dans les secteurs agricoles. De nombreuses valeurs estimées de ces paramètres sont aujourd’hui disponibles dans la littérature économique. Nos principaux objectifs ici sont, d’une part, de mettre en avant des éléments caractérisant de manière générale ces élasticités prix et revenu et, d’autre part, d’identifier les principales sources de variabilité de leurs valeurs estimées dans la littérature. Pour répondre à ce double objectif nous collectons dans la littérature un large ensemble d’élasticités estimées de demande de biens alimentaires que nous analysons ensuite à l’aide d’une méta-régression.Nos résultats mettent en évidence un impact important du niveau de revenu, à la fois au niveau pays (produit intérieur brut-PIB) et au niveau ménage, sur les élasticités prix et revenu : plus le revenu est élevé, moins la demande de biens alimentaires est élastique. Il apparait également que les réponses de la demande aux variations de revenu et de prix diffèrent entre régions du monde indépendamment des différences de revenus pouvant exister entre ces régions. D’un point de vue méthodologique, nous trouvons que le choix de la forme fonctionnelle utilisée pour représenter la demande a un effet significatif sur les élasticités estimées. Ce résultat souligne l’importance de la spécification des fonctions de demande, en particulier de leur flexibilité, dans les modèles de simulation

The decoupling of farm programs: Revisiting the wealth effect

Recent reforms of agricultural policies in developed countries introduced direct payments to the detriment of traditional production enhancing instruments. Whereas these new instruments can influence production through several effects, current empirical studies do not show any significant impact on production; direct payments mainly increase land values. In this article, we revisit the evaluation of the coupling effects passing through the wealth of agricultural households. The initial wealth of these agents, while being mainly in form of land asset holding, is always assumed to be fixed. On the contrary we show theoretically and empirically that, once the impact of farm programs on initial wealth is properly accounted for, the measure of the coupling effects is considerably increased for direct payments and more much marginally for traditional policy instruments. We illustrate the impact of this initial wealth actualisation through a simulation of the suppression of the US corn policy. The impact of this policy was underestimated by two thirds.agricultural policy, decoupling, wealth effect,

Estimating the technical efficiency of damage abatment inputs: an application to pesticides in France

Estimating the technical efficiency of damage abatment inputs: an application to pesticides in Franc

Should private storage be subsidized to stabilize agricultural markets once price support schemes are removed? A General Equilibrium analysis applied to European reforms

The stabilization of European agricultural markets, which was one of the initial objectives of the Common Agricultural Policy (CAP), is today questioned. Indeed, successive reforms have progressively replaced the price support scheme, initially setup by the CAP, by a system of payments more and more decoupled from production and prices. While still supporting agricultural incomes, this evolution tends to reconnect European to international agricultural markets, and so to expose European agricultural producers to market fluctuations they did not face in the past. Regarding this increase of European farmers’ exposure to market risks, more and more attention is being paid today to private risk managing instruments. Some of these instruments, including storage, already existed in the past but were not extensively used by agricultural producers, notably because of the existence of public price supports; althought, private storage behaviors, which derive from inter temporal arbitrages, can reduce price volatility and therefore stabilize markets (Makki, Tweeten, and Miranda, 1996). One can presume that, with the removal of the public price support, private storage will be more and more used on agricultural markets and will mitigate the increase of market volatility induced by this removal. There is however some limits to the use of private storage as a risk managing instrument. Anderson (1992) notably shows that the markets’ stabilization induced by stockholding behaviors is very sensitive to storage costs: a small decrease in storage costs can generate a huge decrease in price volatility. This raises the question as to whether there should be a public intervention on storage, either at the country level or, as proposed by von Braun and Torero (2009), at the world level. One way for governments to intervene on storage is to directly buy or sell stocks, so as to contain market prices within a band determined by a support price and a release price. This kind of mechanism has formerly been used by the European Union (EU) to keep agricultural prices above an intervention level and stabilize markets. However, according to Wright (2012), it is actually both theorically and practically unsustainable and expensive, and can even be destabilizing if it fails. Public stockholdings have actually proven to be very costly (Jha and Srinivasan, 1999). Furthermore, this mechanism generates a decrease of price volatility, which is a necessary condition for private storage to hold, and thus discourage private stockholdings (Glauber, Helmberger, and Miranda, 1989; Zant, 1997). In the United States (US) for instance, the removal, in 1996, of the public storage scheme in agricultural sectors led to an increase of the private storage activity and thus induced almost no changes in the volatility of agricultural prices (Lence and Hayes, 2002). Finally, these buffer stock mechanisms, which can have an impact on production decisions, turn out to be distortive and do not comply with the World Trade Organisation (WTO) rules. Another way for governments to intervene on private storage is to stimulate this activity by providing financial support to stockholders. In their study, where they compare different market stabilization programs, Glauber, Helmberger, and Miranda (1989) conclude that subsidizing private storage is the most cost effective way to stabilize market prices because storage subsidies can easily adjust to stochastic phenomena. However Choi and Meyers (1989) question these results, arguing that they do not account for the (positive) impacts of storage subsidies on production decisions. The issue of the impact of such subsidies on speculative behaviors should also be considered. Indeed, it has often been mentioned that the behaviors of some non rational speculators could destabilized markets (Ravallion (1987), for instance). Femenia (2010), using a dynamic Computable General Equilibrium (CGE) framework shows that, even if they are not fully rational, speculative behaviors tend to bring some stability to agricultural markets, and thus contradicts this assumption. One can however wonder about the new behaviors a storage subsidy could induce. Taking into account all agents’ behaviors, as can a CGE model do, to study the effect of storage subsidies thus seems important. Furthermore, as shown by Jha and Srinivasan (1999) greater price stability achieved through a government intervention does not necessarily imply greater welfare for economic agents: if the policy generates very high government costs the social welfare can decrease. Here again CGE models are the most appropriate tools to simulate these global welfare effects. Yet, whereas CGE frameworks are widely used to study the effects of agricultural policies, none of the aforementioned works dealing with private storage subsidies has been conducted using a CGE model. One of the main reasons is probably that, as pointed out by Wright and Williams (1988), studying the effects of market stabilization mechanisms requires a dynamic framework and, in the case of storage subsidies, the modeling of stockholding behaviors. Few CGE models display such characteristics. Among them is the inter temporal dynamic CGE model developed by Femenia and Gohin (2009) and Femenia (2010) which includes stockholding behaviors and can incorporate imperfect expectations. Our main objective in this paper is to simulate the impacts of a subsidization of storage costs, aimed at stimulating private storage at the world level, on markets fluctuations following CAP reforms, and to study the welfare effects of this public intervention. To do so, we use the aforementioned dynamic CGE model. We simulate the effects of a radical reform: the complete removal of the CAP in arable crops sectors; we then study the impacts of a subsidization of wheat storage costs at the world level. We find, as could be expected, that the CAP removal in arable crop sectors destabilizes European markets and tends to stabilize markets in the United States (US) and in the Rest of the World (RoW). Furthermore, the subsidization of private storage effectively boost the storage activity ; it generates welfare losses, but those are very limited compared to the world welfare gains arising from the CAP removal. However, the effects of this subsidy on market volatilities are contrasted: we find that some cases where crop markets are actually stabilized following the, but in other cases the opposite arises and markets are destabilized. To understand the factors influencing the signs of the effects of the subsidy on price fluctuations, we perform a logistic regression and show that those depend on the form of the agents’ expectations, and on the some distributional characteristics of the productivity shocks arising in the crop sectors. Namely, the more past information is taken into account by economic agents to take their decision, and the more the productivity shocks are negatively auto correlated, the more the storage subsidy is efficient in stabilizing the markets. In the next section we briefly recall the main features of the dynamic CGE model used. Then, we present the data used with a particular focus on the way the “standard” data have been modified to improve the modeling of the CAP instruments in arable crop sectors, we also present the policy scenarios that are simulated. The last section is devoted to the presentation of our main results. Finally we conclude

A Meta-Analysis of the Price and Income Elasticities of Food Demand

Cet article a fait l'objet d'un WP SMART-LERECO n°19-03, voir lienFood demand elasticities are crucial parameters in the calibration of simulation models used to assess the impacts of political reforms or to analyse long-term projections, notably in agricultural sectors. Numerous estimates of these parameters are now available in the economic literature. The main objectives of this work are twofold: we seek first to identify general patterns characterizing the demand elasticities of food products and second to identify the main sources of heterogeneity between the elasticity estimates available in the literature. To achieve these objectives, we conduct a broad literature review of food demand elasticity estimates and perform a meta-regression analysis. Our results reveal the important impacts of income levels on income and price elasticities both at the country (gross domestic product-GDP) and household levels: the higher the income is, the lower the level of elasticities. Food demand responses to changes in income and prices appear to follow different patterns depending on the global regions involved apart from any income level consideration. From a methodological viewpoint, the functional forms used to represent food demand are found to significantly affect elasticity estimates. This result sheds light on the importance of the specification of demand functions, and particularly of their flexibility, in simulation models.Les élasticités prix et revenu de la demande de biens alimentaires sont des paramètres cruciaux intervenant dans le calibrage des modèles de simulation qui sont utilisés pour évaluer l’impact de réformes politiques ou faire des projections de long terme, notamment en ce qui concerne dans les secteurs agricoles. De nombreuses valeurs estimées de ces paramètres sont aujourd’hui disponibles dans la littérature économique. Nos principaux objectifs ici sont, d’une part, de mettre en avant des éléments caractérisant de manière générale ces élasticités prix et revenu et, d’autre part, d’identifier les principales sources de variabilité de leurs valeurs estimées dans la littérature. Pour répondre à ce double objectif nous collectons dans la littérature un large ensemble d’élasticités estimées de demande de biens alimentaires que nous analysons ensuite à l’aide d’une méta-régression. Nos résultats mettent en évidence un impact important du niveau de revenu, à la fois au niveau pays (produit intérieur brut-PIB) et au niveau ménage, sur les élasticités prix et revenu: plus le revenu est élevé, moins la demande de biens alimentaires est élastique. Il apparait également que les réponses de la demande aux variations de revenu et de prix diffèrent entre régions du mondeindépendamment des différences de revenus pouvant exister entre ces régions. D’un point de vue méthodologique, nous trouvons que le choix de la forme fonctionnelle utilisée pour représenter la demande a un effet significatif sur les élasticités estimées. Ce résultat souligne l’importance de la spécification des fonctions de demande, en particulier de leur flexibilité, dans les modèles de simulation

Should private storage be subsidized to stabilize agricultural markets after price support schemes are removed?

Currently, there is increased focus on the methods in which public interventions stabilize agricultural markets. The subsidization of private storage is one of the options advocated. However, the efficiency of such an instrument is still being discussed and has not yet been explored in the context of imperfect information. Nevertheless, this is one of the potential sources of market fluctuations and one of the arguments in favor of a public intervention on agricultural markets. To fill this gap, our main objective in this paper is to simulate the effects of a subsidization of storage costs, aimed at stimulating private storage at the world level, on markets fluctuations following Common Agricultural Policy (CAP) reforms, so as to stimulate private storage at the world level, and to study the welfare effects of this public intervention.Non-PRIFPRI1; Theme 2; Subtheme 2.1MTI

A meta-analysis of the price and income elasticities of food demand

Food demand elasticities are crucial parameters in the calibration of simulation models used to assess the impacts of political reforms or to analyse long-term projections, notably in agricultural sectors. Numerous estimates of these parameters are now available in the economic literature. The main objectives of this work are twofold: we seek first to identify general patterns characterizing the demand elasticities of food products and second to identify the main sources of heterogeneity between the elasticity estimates available in the literature. To achieve these objectives, we conduct a broad literature review of food demand elasticity estimates and perform a meta-regression analysis.Our results reveal the important impacts of income levels on income and price elasticities both at the country (gross domestic product-GDP) and household levels: the higher the income is, the lower the level of elasticities. Food demand responses to changes in income and prices appear to follow different patterns depending on the global regions involved apart from any income level consideration. From a methodological viewpoint, the functional forms used to represent food demand are found to significantly affect elasticity estimates. This result sheds light on the importance of the specification of demand functions, and particularly of their flexibility, in simulation models.Les élasticités prix et revenu de la demande de biens alimentaires sont des paramètres cruciaux intervenant dans le calibrage des modèles de simulation qui sont utilisés pour évaluer l’impact de réformes politiques ou faire des projections de long terme, notamment en ce qui concerne dans les secteurs agricoles. De nombreuses valeurs estimées de ces paramètres sont aujourd’hui disponibles dans la littérature économique. Nos principaux objectifs ici sont, d’une part, de mettre en avant des éléments caractérisant de manière générale ces élasticités prix et revenu et, d’autre part, d’identifier les principales sources de variabilité de leurs valeurs estimées dans la littérature. Pour répondre à ce double objectif nous collectons dans la littérature un large ensemble d’élasticités estimées de demande de biens alimentaires que nous analysons ensuite à l’aide d’une méta-régression.Nos résultats mettent en évidence un impact important du niveau de revenu, à la fois au niveau pays (produit intérieur brut-PIB) et au niveau ménage, sur les élasticités prix et revenu : plus le revenu est élevé, moins la demande de biens alimentaires est élastique. Il apparait également que les réponses de la demande aux variations de revenu et de prix diffèrent entre régions du monde indépendamment des différences de revenus pouvant exister entre ces régions. D’un point de vue méthodologique, nous trouvons que le choix de la forme fonctionnelle utilisée pour représenter la demande a un effet significatif sur les élasticités estimées. Ce résultat souligne l’importance de la spécification des fonctions de demande, en particulier de leur flexibilité, dans les modèles de simulation

Functional Forms Commonly Used in CGE Models

AGRODEP technical note 02This technical note presents a review of the functional forms commonly used to represent demand and production in Computable General Equilibrium (CGE) models. The general properties of demand and production functions are described. The note also includes the detailed derivation of some specific functions

Literature review on the estimations of food demand elasticities

Literature review on the estimations of food demand elasticitie