14.; .u.:;. .1. SI. i . 5: 5. s.‘~n.\ ;: 5;: ~51 7 Si 333‘): . r 1f ‘1... {Mi-S I LIBRARIES “ll llllllllllulflmi Ill'lclllll ll 3 1293 01421 This is to certify that the dissertation entitled ANEXCMNIC ANALYSIS OF THE SUNFLONERSEED SECICR INSPAIN presented by Javier Fernandez has been accepted towards fulfillment of the requirements for Ph.D. degree in Agricultural Foamics Major professor Date April 2, 1996 MS U is an Affirmative Action/Equal Opportunity Institution 0-12771 LIIR‘ARY University Michigan State PLACE IN RETURN BOX to remove this checkout from your record. TO AVOID FINES return on or before date due. DATE DUE DATE DUE DATE DUE ll ;__Jl fil =_J ll 1— l MSU Is An Affirmative Action/Equal Opportunity Institmion Wanna-9.1 AN ECONOMIC ANALYSIS OF THE SUNFLOWERSEED SECTOR IN SPAIN BY Javier Fernandez A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Agricultural Economics 1996 ABSTRACT AN ECONOMIC ANALYSIS OF THE SUNFLOWERSEED SECTOR IN SPAIN BY Javier Fernandez This research is focused on the potential consequences that the evolution of the Common Agricultural Policy (CAP) of the European Union (30) could have on the Spanish sunflowerseed sector. The study analyses the effects that different compensatory payments levels granted in the oilseeds and cereal sectors could have on the total area planted with sunflowerseed in Spain, as well as on the Spanish production, consumption and net trade of sunflowerseed, sunflowerseed oil and sunflowerseed meal. Econometric models are developed to simulate the historical evolution of supply and demand in the Spanish sunflowerseed sector during the 1970-1995 period. The study of supply is carried out independently of the analysis of demand, and prices and compensatory payments levels are treated as exogenous variables. Net trade is deduced residually from the results obtained in the supply and demand models. The analysis of supply is mainly concentrated on the simulation of the Spanish sunflowerseed acreage in relation to alternative models accounting for the formation of farmers' expectations about gross margins per hectare in the production of sunflowerseed and of its alternatives. Due to a lack of official sources about agricultural costs of production in Spain, the present study constructs relevant variable costs of production series, extrapolating the information obtained from different available case studies on the production of rain fed and irrigated sunflowerseed and of rain fed wheat. The results of the supply analysis suggest that rain fed and irrigated sunflowerseed producers form their expectations about gross margins according to the same rational expectation model. The analysis of supply also confirms that the farmers' expectations about gross margins in the production of rain fed wheat influence significantly the Spanish rain fed sunflowerseed acreage. The analysis of demand is mainly focused on the consumption of bottled sunflowerseed oil and indicates inelastic own price, cross price and income elasticities for the demand of bottled sunflowerseed oil. The supply and demand estimations are utilized to generate relevant projections for the 1996-2005 period. The projection process is done according to five alternative scenarios, being the future levels of compensatory payments the only exogenous variable that changes among scenarios. To Antonio Salido, my grandfather, for keeping me well informed about the recent evolution of the Spanish agricultural sector. iv ACKNOWLEDGMENTS I would like to thank everyone who has contributed, either directly or indirectly, to this research. Dr. John Ferris, my academic advisor, has been unceasing in his support throughout my research at Michigan State University. His advice and research experience were invaluable during this study. Dr. Peter Schmidt was a valued member of my committee both for his professionalism and his guidance. I gratefully acknowledge his intellectual and moral assistance. The other member of my thesis committee, Dr. David Schweikhardt, provided timely and constructive criticisms which improved the quality of this research. I would also like to thank Dr. Kandeh Yumkella for serving in my guidance committee and for his help and interest. This dissertation would not have been possible‘without the financial support of the Instituto Nacional de Investigaciones Agrarias. My appreciation is extended to Dr. Javier Calatrava, from the Centro de Investigacién y Desarrollo Agrario of Granada, for his advice about my dissertation topic and for his recommendations during the data collection process. I am grateful to Dr. Juan Dominguez, from the Departamento de Oleaginosas del Centro de Investigacién y Desarrollo Agrario of Cordoba, and to Luis Ballesteros, from the Direccién Provincial del Ministerio de Agricultura, Pesca y Alimentacién in Cuenca, for providing valuable information about my dissertation topic. I would also like to thank all the people from the different departments of the Ministerio de Agricultura Pesca y Alimentacion in Madrid.who have responded to my demands for data and information about the SGCtOI . Finally, I am indebted to my parents for their invaluable cooperation in the process of data collection, as well as to my girl friend Maria for her support and patience during all my doctoral program. vi TABLE OF CONTENTS CHAPTER LIST OF TABLES 00.00.00...OOOOOOOOOOOOOOOOOO000...... LIST OF FIGURES ........ ..... OOOOOOOOOOOOOOOOOOOOOOOO I. INTRODUCTION 0......OOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO 1. Objectives of the Study ....................... II. Organization of the Thesis ......... .. ......... II. BACKGROUND AND SETTING . ..... I. The Spanish Agricultural Sector . .............. II. The Sunflowerseed Sector in Spain ............. a. Production OOOOOOOOOOOOOOOOOOOOOO0.0.0.0.... l. Sunflowerseed 2. Sunflowerseed Meal b. Consumption ........ l. Sunflowerseed 2. Sunflowerseed c. Prices ............. d. Trade . ..... ........ III. DEVELOPMENT OF GROSS MARGINS I. Sunflowerseed Rain Fed Production .. ..... ...... Oil and Production ............. Oil Consumption .. ...... Meal Consumption ....... ....... OOOOOOOOOOOOOOOOO SERIES OOOOOOOOOOOOOOOO. Production ............. II. Wheat Rain Fed Production ........ ............. III. Sunflowerseed Irrigated Production ..... .. ..... vii Page ix xi 13 13 13 39 42 43 52 54 6O 66 69 94 107 CHAPTER Page IV. ECONOMETRIC ANALYSIS OF SUPPLY .......... ..... ...... 121 I. Agricultural Supply of Sunflowerseed .......... 123 a. Rain Fed Supply ............................ 125 1. Rain Fed Area . ........ ............... 125 2. Rain Fed Yield ....................... 155 b. Irrigated Supply ........................... 160 l. Irrigated Area ....................... 160 2. Irrigated Yield ...................... 177 II. Industrial Supply of Sunflowerseed Oil and Meal 000000000000 0000000000 183 V. ECONOMETRIC ANALYSIS OF DEMAND ...................... 189 I. Demand of Bottled Sunflowerseed Oil .......... . 190 II. Demand of Sunflowerseed Meal ... ............... 205 III. Demand of Sunflowerseed by the Oil Industry .......... ........ 209 IV. Price Equations ... ............................ 211 VI. PRODUCTION, CONSUMPTION AND TRADE PROJECTIONS ....... 215 I. Exogenous Variables Projections ...... ......... 217 II. Compensatory Payments and Endogenous Variables Projections . ............ 237 a0 First scenario 00000000000000 00000 0000000000 239 b. Second Scenario .............. ...... . ....... 250 0. Third Scenario .. ....... ... ................. 254 d. Fourth Scenario ........................ .... 256 e. Fifth Scenario .. ..................... . ..... 263 VII. SUMMARY AND CONCLUSIONS . ........ ...... .............. 272 LIST OF REFERENCES 0 0 0 0 0 0 0 00000000000 0 0 00000000000000 281 viii TABLE LIST OF TABLES Gross Margins in Rain Fed Sunflowerseed Production, in 1976 and 1982 ...... ............. Gross Margins in Rain Fed Sunflowerseed Production, in 1986 and 1989 ..... .............. Gross Margins in Rain Fed Sunflowerseed Production, in 1990 and 1994 ................... Variable Costs, Gross Revenues and Gross Margins in Pesetas per Hectare, in the Spanish Rain Fed Sunflowerseed Production (1964-1995) ....... Gross Margins in Rain Fed Wheat Production, in 1976 and 1982 ... ........ .. .................. Gross Margins in Rain Fed Wheat Production, in 1986 and 1990 0000 000000 0000000 00000000000000 Variable Costs, Gross Revenues and Gross Margins in Pesetas per Hectare, in the Spanish Rain Fed Wheat Production (1964-1995) ........... ........ Gross Margins in Irrigated Sunflowerseed Production, in 1976 and 1982 ........... ..... ... Gross Margins in Irrigated Sunflowerseed Production, in 1986 and 1990 ...... ............. Gross Margins in Irrigated Sunflowerseed Production, in 1994 ...... ........ .............. Variable Costs, Gross Revenues and Gross Margins in Pesetas per Hectare, in the Spanish Irrigated Sunflowerseed Production (1964-1995) ........... Evaluation of Different Rain Fed Supply Models ....... Rain Fed Sunflowerseed Area in Spain (1970-1995) ..... Evaluation of Different Irrigated Supply Models ...... Irrigated Sunflowerseed Area in Spain (1970-1995) .... Evaluation of the Irrigated and Rain Fed Yield Equations 00000000000000.000 00000000000000 Consumption of Bottled Sunflowerseed Oil in Spain (1980-1995) ....... . ................... ix 84 88 90 102 105 111 113 115 118 154 156 176 178 182 201 TABLE Projections of Sunflowerseed Area in the Baseline Scenarios (1996-2005) ..... ............ Sunflowerseed Balance Sheets Projections in the Baseline Scenario (1996-2005) .............. Sunflowerseed Oil Balance Sheets Projections in the Baseline Scenario (1996-2005) ........... Sunflowerseed Meal Balance Sheets Projections in the Baseline Scenario (1996-2005) ........... Projections of Sunflowerseed Area in Scenarios II and III (1996-2005) . ......... ..... Sunflowerseed Balance Sheets Projections in Scenarios II and III (1996-2005) ..... .......... Sunflowerseed Oil Balance Sheets Projections in Scenarios II and III (1996-2005) ............ Sunflowerseed Meal Balance Sheets Projections in Scenarios II and III (1996-2005) ........ .... Projections of Sunflowerseed Area in Scenarios IV and V (1996-2005) ................. Sunflowerseed Balance Sheets Projections in Scenarios IV and V (1996-2005) ...... ........... Sunflowerseed Oil Balance Sheets Projections in Scenarios IV and V (1996-2005) .. ............ Sunflowerseed Meal Balance Sheets Projections in Scenarios IV and V (1996-2005) . ............. 248 249 255 257 258 259 264 266 FIGURE 6.4 LIST OF FIGURES Page Rain Fed, Irrigated and Total Sunflowerseed Area in Spain, (1964—1993) 00000000000000.000000 16 Major Sunflowerseed Producer Zones in Spain .......... 18 Average Rain Fed and Irrigated Sunflowerseed Yields in Spain, (1970-1995) .... ............... 20 Sales of Bottled Olive Oil, Bottled Sunflowerseed Oil and Other Oilseeds Bottled Oil in Spain, (1973-1990) eeeeeeeeeeeeeeeeeeeeeeeeee 49 Retail Prices for Bottled Olive Oil and Bottled Sunflowerseed Oil in Spain, (1973—1990) ... ..... 59 Actual and Predicted Rain Fed Sunflowerseed Area in Spain, (1970-1995) .......... ........... 157 Actual and Predicted Irrigated Sunflowerseed Area in Spain, (1970-1995) ........ ............. 179 Projected Average Compensatory Payments for Rain Fed Sunflowerseed, under the Different Scenarios, (1996-2005) .. ............. 241 Projected Average Compensatory Payments for Rain Fed Wheat, under the Different Scenarios, (1996-2005) . .............. 252 Projected Average Compensatory Payments for Irrigated Sunflowerseed, under the Different Scenarios, (1996-2005) .. ............. 262 Projected Sunflowerseed Acreages under the Different Scenarios, (1996-2005) ............... 270 xi CHAPTER I INTRODUCTION The sunflowerseed sectom' is an_ important component of Spanish agriculture. Oil varieties of sunflowerseed were introduced in 1964 for the first time and, currently, the production of sunflowerseed is generalized in many zones of Spain. Moreover, sunflowerseed production is an important source of income for Spanish farmers, especially in the Southern and Central regions of Spain. The consumption of sunflowerseed oil in Spain has grown very significantly during the last 20 years. Sunflowerseed oil was in 1995 the second vegetable oil most consumed in Spain. Historically, the development of sunflowerseed production can be explained in terms of agricultural policies that have sustained sunflowerseed prices at levels well above those prevailing in the international market. Although Spain did not enter the European Community (EC) until 1986, agricultural policies related to the sunflowerseed sector were already very similar in Spain and in the EC-10: in the EC-lO, prices were also guaranteed above world market levels although at higher levels than in Spain. Since Spain’s accession to the EC, Spain's agricultural policies in the sunflowerseed sector have moved progressively toward the implementation of the Common Agricultural Policy (CAP) of the EC. A transitional period of five years was established for the integration of the Spanish oilseeds sector in the CAP regulatory mechanisms; in 1991, the Spanish sunflowerseed sector was fully integrated into the CAP. In 1992, the European Commission undertook a deep reform of the regulatory mechanisms of the CAP in the oilseeds sector. Since 1992, public intervention in the sunflowerseed market has been eliminated and 2 sunflowerseed prices have been freely determined by the market; these prices have decreased dramatically and have been at similar levels to those prevailing in the international market. Sunflowerseed oil prices have also decreased profoundly. However, the deflationary trend in sunflowerseed oil prices has not affected very significantly consumption patterns in the Spanish vegetable oils market: there have been moderate increases in the consumption per capita of sunflowerseed oil and, in general, only relatively modest decreases in the per capita consumption of bottled olive oil, the primary competitor with sunflowerseed oil. In order to compensate oilseeds producers for the fall in prices, the European Commission has established a system of deficiency payments per hectare. As a matter of fact, since 1992, Spanish sunflowerseed producers have been receiving a much higher proportion of their gross revenues by means of deficiency payments than by selling sunflowerseed in the market. Since 1993, the compensatory payments scheme have also been applied to other arable crops, such as cereals. However, in the case of cereals the deficiency payments were initially established at much lower levels than for oilseeds; besides, the intervention, price ‘policy is still maintained in the cereal sector, although the real value of the intervention prices is being progressively reduced. The shift to the compensatory payments system, along with extraordinarily dry weather from 1992 to 1995, has encouraged a major expansion of sunflowerseed production. For example, the area planted with sunflowerseed in Spain was 50% higher during the 1992-1995 period than during the 1985-1991 period (Ministerio de Agricultura, 1994). Sunflowerseed yields have decreased after CAP reform; however, during the 1992-1993 period, the increase in the sunflowerseed acreage resulted in a significant rise in the production of sunflowerseed, sunflowerseed oil and sunflowerseed meal. 3 In 1994 and, especially, in 1995, sunflowerseed yields have been at even lower levels, mainly due to the effects of a severe and persistent drought, and this has affected negatively the production of sunflowerseed and sunflowerseed products. The final effects that the reform of the CAP mechanisms regulating the oilseeds market could have on the Spanish sunflowerseed sector are still unclear, and would depend on the future compensatory payments levels granted in the production of sunflowerseed and other competing arable crops. There is growing concern about the consequences that the potential future evolution of the levels of compensatory payments, granted by European Union (EU) to sunflowerseed and other arable crops producers, could have on the total area planted with sunflowerseed in Spain; this would also affect the Spanish production of sunflowerseed, sunflowerseed oil and sunflowerseed meal. On the demand side, there is also interest about potential future developments in the vegetable oils market under an environment characterized by relatively low sunflowerseed oil prices. The analysis of this question could help to answer policy issues related to the levels of consumption, and the degree of self-sufficiency, in the sunflowerseed oil and sunflowerseed meal markets. 1- W91. The study focuses on the effects of the reform of the CAP mechanisms for oilseeds and other arable crops markets, on the Spanish sunflowerseed sector. The primary objective of the research is to increase the understanding of the consequences that the end of the intervention price policy for oilseeds, and the reform of the CAP in competing arable crops, could have in the Spanish sunflowerseed sector. This dissertation focuses on the analysis of supply, although some attention is also given to the study of demand in the sunflowerseed sector. Thus, the main research problem in this dissertation consists of the evaluation of how the total area planted with sunflowerseed in Spain, 4 could be affected by the possible future evolution in the levels of the compensatory payments that the EU grants to arable craps producers. The study performs a sensitivity analysis, trying to determine how different scenarios, constructed according to potential future levels of compensatory payments, could affect the total number of hectares planted with sunflowerseed in Spain during the 1996-2005 period. An additional issue that this study addresses is the analysis of the effects of the decline in sunflowerseed prices on sunflowerseed yields and, consequently, on the Spanish production, consumption and net trade of sunflowerseed; as well as on the Spanish consumption, production and net trade of sunflowerseed oil and sunflowerseed meal. The specific objectives of this dissertation are related to the development of an econometric commodity analysis adapted to the sunflowerseed sector in Spain. This requires the construction of supply and demandimodels that are utilized to simulate consumption and production in the Spanish sunflowerseed, sunflowerseed oil and sunflowerseed meal markets. The study uses annual data at the national level. For the analysis of supply, this dissertation constructs series on gross revenues, gross margins and variable costs for rain fed and irrigated sunflowerseed, and for rain fed wheat; these series cover the 1964-1995 period. The econometric simulation of the historical data on sunflowerseed area, yields and production, as well as on the production of sunflowerseed oil and sunflowerseed.meal, is focused on the 1970-1995 period. The simulation of the historical data on demand for sunflowerseed oil is concentrated on the 1980-1995 period; the simulation of the historical data on sunflowerseed meal consumption on the 1977-1995 period; and, finally, the simulation of the demand for sunflowerseed by the sunflowerseed oil industry focuses on the 1970-1995 period again. In.marketing analysis, it is common to find studies where supply and demand models are developed simultaneously, by means of multi-equational systems in whichimarket prices are determined by the interaction of supply 5 and demand. This study does not use that approach, and performs separated and unrelated supply and demand analyses, where prices and compensatory payments are exogenously determined. For the 1970-1991 period, this methodology could be justified because sunflowerseed price levels were strongly influenced by the guaranteed prices that were institutionally determined, first by the Spanish Ministry of Agriculture, and later by the EC. For the 1992-1995 period, the variable most relevant to explain the evolution of the sunflowerseed supply has been the levels of deficiency payments granted to farmers, which are also determined by the policy maker. In relation to sunflowerseed prices, they have been around world market levels since 1992, and it is very unlikely that the Spanish production alone could have a significant effect on the international prices for sunflowerseed and sunflowerseed oil. Moreover, this study does not intend to model the actions of the policy maker, as has been done in some previous markets studies (Meilke and Griffith, 1983; Meilke and de Carter, 1988). Therefore, the analysis gives an exogenous character to sunflowerseed prices -even after the reform of the CAP- and to the levels of direct payments per hectare. Although sunflowerseed prices are treated as an exogenous variable, the study models sunflowerseed oil and sunflowerseed meal prices. Sunflowerseed oil prices are set as a function of sunflowerseed prices: hence, sunflowerseed prices are identified as the main historical determinant of sunflowerseed oil prices; in fact, after CAP reform, market sunflowerseed prices are, perhaps, the only factor influencing sunflowerseed oil prices in Spain. On the other hand, sunflowerseed meal prices are econometrically related to soybean meal prices. In the study, net trade on sunflowerseed, sunflowerseed oil, and sunflowerseed meal is determined residually from the results of the supply and demand analysis. This orientation is very common in the literature, and it is not difficult to find examples of its utilization (Josling, 1967; Ferris et al, 1971; Kalaitzis, 1978; Peterson, 1981). 6 Hence, this dissertation does not model net trade in sunflowerseed and sunflowerseed products. This approach could be justified because the Spanish volume of trade in these commodities is relatively small, especially if compareduwith domestic consumption and production. Thus, the assumption that net trade has a residual character seems to fit well the historical evolution of the Spanish sunflowerseed sector. In the analysis of supply, the most refined models are focused on the simulation of the evolution of the annual area planted with sunflowerseed. Expected gross margins per hectare are included as independent variables, and this represents an innovation with respect to previous studies about the sector. The utilization of gross margins type variables permits the concentration of information obtained from a wide range of different variables, such as prices, compensatory payments and costs of production. The large decrease in sunflowerseed prices, along with the increase in the acreage planted with sunflowerseed that has resulted from the reform of the CAP, gives a special justification for the utilization of gross margins as independent variables. Thus, the recent evolution of the area planted with sunflowerseed cannot be explained with the use of sunflowerseed prices alone. Moreover, a lack of degrees of freedom prevents the analysis of the historical development of the sunflowerseed acreage only in terms of the compensatory payments that were established after the reform of the CAP. Besides, the utilization of gross margins also permits to include into the econometric analysis of supply, the significant decreases in variable costs that have arisen since the reform of the CAP in the sunflowerseed sector. The main difficulty to use gross margins in the supply analysis, is that, in Spain, there are not official publications providing time series data about costs per hectare in the production of sunflowerseed, or of any other crop. Thus, in order to be able to compute gross margins series, this study uses data on variable costs of production that have been obtained from different case studies about costs in the production of 7 sunflowerseed, and of its alternatives in the agricultural production process. Hence, this dissertation constructs variable costs and gross margins series on the production of rain fed sunflowerseed and wheat and of irrigated sunflowerseed, from the information provided in these case studies. The construction of the gross margins series has granted the opportunity to test different econometric models, accounting for the formation of farmers expectations about gross margins. In the analysis of domestic demand the study simulates the quantities consumed of bottled sunflowerseed oil, of sunflowerseed meal, and the quantities of sunflowerseed that the oil industry crushes. In the specific study of the demand for bottled sunflowerseed, the retail prices of bottled olive oil are included in the analysis, due to the high degree of substitutability in consumption between bottled olive oil and bottled sunflowerseed oil. All the study of demand is performed using single equation techniques. The primary economic actors in the study are the farmers producing sunflowerseed, the consumers consuming sunflowerseed oil, and, to a lower extent, the farms consuming sunflowerseed meal. Other actors that are of interest to the study, are sunflowerseed oil and sunflowerseed meal producers and distributors. However, the modelling effort does not focus so much on them, due to the lack of available secondary data sources. Other economic agents that could have also some influence on the Spanish sunflowerseed sector are input suppliers, credit institutions, extension services, etc. Nevertheless these actors are not specific to the sunflowerseed sector, but to the whole Spanish agriculture, and consequently are not included in the study, in order to keep the analysis within the confines of a dissertation. II. Organization of the Thesis. The results of this study are presented in the next six chapters. Chapter II includes descriptions of the Spanish agriculture and of the 8 Spanish sunflowerseed sector. Chapter III is focused on the development of gross margins series for the production of sunflowerseed and wheat in Spain. 1 Chapter IV and V are devoted to the econometric analysis of supply and demand, respectively. In both chapters, the results of the simulation models used to forecast production, consumption and trade are presented and evaluated. In Chapter VI, the supply and demand models are utilized to perform short t0>medium term forecasts. Specifically, the forecasts concentrate on the 1996-2005 projection period, and are developed according to five different scenarios related to the potential future evolution of the levels of the compensatory payments, granted by the CAP to sunflowerseed and wheat producers. The results of these forecasts are also utilized to previde some policy recommendations. Finally, Chapter VII presents a summary of the results and some concluding comments. CHAPTER II BACKGROUND AND SETTING The purpose of this chapter is to provide background information relevant to the objectives of the study. First, it presents an introduction to the recent evolution of the Spanish agricultural sector. It continues with a description of the sunflower sector in Spain, focusing on the analysis of production, consumption, prices and net trade, within this sector. 1- Wu Agriculture continues to form an important component of the Spanish economy although its relative importance has declined. Spain has experienced substantial agricultural growth and modernization since the 1960s. Except for some agricultural practices, in very specific crops, Spanish agriculture is highly mechanized. Agriculture has also become more specialized and more commercially oriented. The improvement of irrigation practices, as well as a more developed extension system, also explain the increases in productivity. In general, irrigated areas, horticultural and livestock production have been expanding, while marginal dry farmed areas and their associated crops have been contracting. Spanish agriculture is less developed, structurally and technically, than in most EU countries, partly because of relatively low levels of capital application. Besides, if compared with other EU members, the Spanish agriculture is conditioned by, on average, adverse agro-climatic conditions. An important proportion of the land is semi-arid or mountainous. Low rainfall levels are an usual problem, especially in Southern Spain. 10 The presence of structural constraints also prevents, to some extent, the development of the Spanish agriculture. In 1994, agriculture employed 10.7% of the workforce, but accounted only for 4.6% of GDP (MAPA, 1994). The farm population has decreased and the age of those remaining has increased. Moreover, although the average Spanish farm was only 13.8 hectares in 1994, land is very unevenly distributed. Sixty per cent of holdings are less than 5 hectares and account for 8.4% of the utilized agricultural land, being most of these holdings concentrated on Northwestern Spain; on the other hand, only 2.1% of landholdings are over 100 hectares, but they comprise 39.8% of agricultural land (MAPA, 1989). The principal products of the Spanish agriculture are fruits and vegetables, milk, beef, poultry and eggs, pigmeat, and cereals (mainly wheat and barley). Mediterranean products, such as wine and olive oil, are also important, especially in the less developed regions. Agricultural exports are an important component of trade, representing between ten and twenty percent of total exports, depending on the year (Salmon, 1991). Citrus, fresh and processed vegetables, cereals, wine and vegetable oils are the main commodities exported. Nonetheless, Spain is highly dependent on feedgrains imports, and especially on imported corn and soybeans (MAPA, 1994). Moreover, an increasing proportion of agricultural trade is with other EU members. Until recently, trade with the EU has been roughly in balance. However, in the 19903, food imports from EU countries are growing faster than exports. Spanish agricultural policy has been traditionally oriented toward the attainment of self sufficiency in food. As a consequence, there has been a strong public intervention in the Spanish agricultural markets during the last half of the century. After the Spanish civil war, agricultural policies were oriented toward self sufficiency in basic food staples, such as cereals. A special agency, the Servicio Nacional de Cereales (SNC), was created within the Spanish Ministry of Agriculture (Ministerio de Agricultura, Pesca y Alimentacion), in order to undertake price and marketing policies that promoted the national production of 11 wheat and other cereals. SNC was later enlarged to the Servicio Nacional de Productos Agrarios (SINPA). SENPA guaranteed the purchase price for a wider range of crops, including cereals and oilseeds, and it subsidized seeds and fertilizers. In the 1960s, due to increased growth in the demand for meat, agricultural policy was reoriented to support the expansion of the livestock sector. In 1968, the Fondo the Ordenacion y Regulacién de Productos Agrarios (PORPA), was created to establish intervention prices for certain crops, livestock products, and vegetable oils. Other functions of FORPA were the regulation of foreign trade, and the administration of subsidies and other producer aids. SENPA was integrated into FORPA, and specialized on the regulation of cereals, oilseeds and other arable crops markets. During the 1970s, FORPA initiated a process of harmonization of its market regulation and price policy mechanisms with those of the CAP. This new orientation to Spain's agricultural policy intended to facilitate accession to the DC. As a result, the agricultural policy systems of Spain and of the EC began to be based on similar mechanisms, years before Spain entered the IC (Tamames, 1990). In 1986, Spain joined the EC, now EU. From that year onwards, Spain's agricultural policy has been developed within the institutional framework. of the EU. FORPA interventions in the market have been coordinated with the European Agricultural Guidance and Guarantee Fund (IAGGF), the agency administering the CAP. Since the mechanisms of agricultural policy in Spain were already similar to those in the BC, the adoptioniof CAP affected intervention levels and the number of commodities covered rather than requiring the development of unfamiliar management methods (USDA, 1990). Nevertheless, there were three important differences between the Spanish intervention system and that in the CAP. First, in Spain, sales of a number of commodities (wheat, tobacco and sugar beets), were directed through public agencies. Second, in Spain, the state controlled trade in 12 cereals, vegetable oils, milk products, cotton, tobacco and meat, which together represented.a substantial proportiontof total agricultural trade. Finally, the breath of the state intervention was less in Spain. To gradually accommodate Spanish agriculture to CAP, some restrictions to agricultural trade between Spain and the EC were established during a transitional period. Two transitional models were agreed, one for fresh fruits and vegetables and other for the rest of agricultural products. The general model was one of seven years, with completion by the first of January of 1993. For fresh fruits and vegetables the transition was supposed to extend over ten years (MAPA, 1987). However, in practice, and due to the introduction of the Single European Market in 1993, which embodied the elimination of all trade barriers within the EU, full integration was achieved also in 1993 for the fresh fruits and vegetables sector. Thus, all agricultural tariffs with the EU have been progressively abolished, and other trade restrictions, such as the state control of agricultural trade and marketing for some commodities, have ended. Apart from the peculiarities established for the different subsectors of the Spanish agriculture, in general Spanish institutional prices and subsidies have converged progressively toward the levels prevailing in the different commodity programs of the CAP. For most products, institutional price levels were higher under CAP than under former Spanish agricultural policies. Today CAP is undergoing a major reform process. This reform effort is taking place due to both internal and external pressures. Internal pressures for reform have resulted from the very high growth of budgetary spending under the CAP, and its effect of stimulating excess agricultural supply. External pressures for reform have come from negotiations in the Uruguay round of the GATT. The reform of CAP includes more realistic product pricing, quantity restrictions and land set-aside schemes. As a result, for many commodities, intervention prices have been declining in nominal tenms 13 during the 1990s (European Commission, 1993). To compensate for this fall in prices, there is a tendency toward an increase of the relative importance of direct deficiency payments as a form of subsidization to farmers. 11. Win... The development of the Spanish production of sunflowerseed has been a key factor in order to satisfy ,with internally produced raw'materials, the demand for vegetable oils in Spain. Since the 1970s, sunflowerseed oil has been the second vegetable oil most consumed in Spain‘. Apart from sunflowerseed oil, the sector also produces an important quantity of sunflowerseed meal, that, to a modest extent, has helped to reduce Spain's imports of livestock feeds. The rest of the chapter, describes the structure of the sunflowerseed sector in Spain. An understanding of the sector’ provides the framework for the econometric models that are developed in later chapters of the dissertation. 11... W1 II.a.1. Sunflowerseed Production. The Spanish production of sunflowerseed has expanded dramatically during the years of the 1970-1995 period. Since the late 1960s, the rate of growth of the area planted with sunflowerseed has been impressive. In 1960, the planted acreage was 3,600 hectares, and included only non oil varieties that were directed toward human consumption. In 1964, oil varieties suited for industrial purposes, were introduced for the first time. The area planted with sunflowerseed then was 12,646 hectares, small figure if compared with the 1,378,729 hectares planted in 1994 (MAPA, 1994). The growth of the total acreage planted with sunflowers has been accompanied by a parallel increase in the Spanish production of 'Olive oil has, up to 1995, remained as the most consumed oil. 14 sunflowerseed. In 1964, Spain produced 10,900 tons of sunflowerseed. This quantity increased to 415,807 tons in 1975, and continued to grow up to 915,343 tons in 1985. In 1994, 986,900 tons of sunflowerseed were produced in Spain (MAPA, 1994). Almost all the production corresponds to oil varieties of sunflowerseed. In the early 1990s, Spain was the second sunflowerseed producer in the EU, after France, and shared around 5‘ of total world production (European Consission, 1993). However, Spain is not a major sunflowerseed exporter in the international market. The Spanish volume of trade in sunflowerseed tends to be very small; Spain usually exports very low quantities of sunflowerseed and only in bad harvest years imports significant sunflowerseed amounts. During the 1990s, France has lead the world export market; the US and Argentina are also very important exporters. Historically, the production of sunflowerseed has been mostly concentrated in Southern and Central Spain. The most traditional sunflowerseed producer provinces in Spain, are Seville, Cordoba and CAdiz, located in Southern Spain, and Cuenca and Badajoz, located in Central Spain. Together, they accounted for about 651; of the area planted with sunflower, and for over 70% of the sunflowerseed produced in Spain during the 1985-1993 period (MAPA, 1993). Most of the area planted with sunflowerseed is rain fed. For example, the rain fed acreage accounted for around 85% of the total sunflowerseed area during the 1985-1994 interval. Nonetheless, the proportion of the area that is irrigated has increased substantially during the 1980s and the 1990s. Moreover, during the 1985-1994 period, the irrigated production of sunflowerseed contributed, on average, to nearly 35‘ of total national production (MAPA, 1994). Furthermore, irrigated land is an scarce resource in Spain. Therefore, although the area planted with irrigated sunflowerseed has expanded considerably in Spain during the 1980s and 1990s, it could never 15 reach the levels already achieved by the area planted with rain fed sunflowerseed. Productivity per hectare -around 360 Kg. per rain fed hectare, and 1,200 Kg. per irrigated hectare in 1995- has historically been below the average of the EU, and of the main world producers. Besides, yields have experienced a relatively high degree of variability over the years, depending highly on weather conditions (Gomez-Arnau, 1988); the amount of rain that falls in spring has a significant influence over the quantity of seed per hectare harvested in summer. Under extreme circumstances, weather has also been a factor influencing farmers' planting decisions. Very dry falls and winters have usually been accompanied by a decrease in the area planted with cereals and by an increase in the area planted with sunflowerseed. For example, from 1991 to 1995, there has been a very severe drought in Spain, that has been accompanied by a substantial increase in the area planted with sunflowerseed. This could be explained by the relatively good resistance that the deep and extensive root system of sunflowers provides against dry weather. Apart from climatic conditions, some authors argue that the relatively low yields characteristic of the Spanish sunflowerseed production could be explained because the seed varieties that have been adopted by farmers are not the most appropriate for Spain (Montero and Moro, 1988). In any case, the implantation of hybrid seed varieties has become increasingly common. In the early 19903, hybrid seeds varieties accounted for nearly 90% of the total seed planted in Spain (de la Rosa, 1992). The result is that yields, although still low if compared with other European countries, are significantly higher than in the 19603 and 19703, when mostly non-hybrid varieties were used. Rain fed sunflowers are planted in March and April, albeit in some Northern provinces of Spain it is possible to plant sunflowers as late as May. Up to the early 19803, the planting process was done with cereal 16 Sunflowerseed Area eeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeeee Hectares (Millions) 0.5. .................................. ".. ........................................ O _._m. ......v.. TIIIITrIIIII 54 70 75 80 85 90 93 Year -+— Rain Fed Area -*- irrigated Area + Total Area Figure 2.1. Rain Fed, Irrigated and Total Sunflowerseed Area in Spain, (1964-1993). Source: MAPA. l7 planters; since the late 19803, the use of higher precision planters is generalized (Koipesol, 1987). Normally, the crop is not fertilized, except in the case of irrigated production. Most of the rain fed sunflowerseed produced is harvested in the months of August and September. However, the sunflowerseed planted in the Northern provinces is harvested in October. The harvest is done using cereal harvesters with slight modifications. Usually, rain fed sunflowers are grown in rotation with cereals, especially wheat. It is recommended that sunflowerseed be grown once every three or four years. Planting wheat or barley, leaving the land idle during the next year, and planting sunflowerseed the following year is perhaps the most advisable agricultural rain fed production procedure (Puerta, 1980). However, in practicesmany rain fed farmers plant sunflowerseed every two years, following a cereal-sunflowerseed rotational pattern. It is not uncommon either to plant sunflowerseed in consecutive years if a favorable ratio of gross revenues to variable costs persists, although this practice is not very recommendable from the point of view of soil conservation (del Valle, 1987). Irrigated sunflowerseed is mainly planted as a first crop, although it has also found a wide acceptance as a second crop in irrigated land. However, yields are significantly lower for irrigated sunflowerseed as a second crop than for irrigated sunflowerseed as a first crop. If produced as a first crop, irrigated sunflower is usually planted in late Spring and the harvest takes place as late as October. In the case of irrigated sunflowerseed a3 a second crop, double cropping with irrigated sunflower being planted immediately after irrigated winter wheat is perhaps the most common option (Alba, 1990). To a lesser extent, irrigated sunflowerseed is planted also after irrigated corn. A third option, that is becoming increasingly common, is to plant irrigated sunflowerseed after irrigated extensive fresh vegetables (carrots, potatoes, etc) (de la Rosa, 1992). In this case irrigated sunflower is planted around March. 18 Figure 2.2 Major Sunflowerseed Producer Zones in Spain. 19 The average size of the typical sunflowerseed farm in Spain is relatively large. Most farms usually growing sunflowerseed are of medium and large size. About 59% of sunflowerseed farms are between 10 and 100 hectares and they comprise 47% of the; land planted with sunflowers. Landholdings larger than 100 hectares account for 11% of the sunflowerseed farms and they comprise around 48% of the land planted with sunflowers. On the other hand, 30% of the farms producing sunflowerseed are below 10 hectares but they account only for 5% of the land producing sunflowerseed (Junta de Andalucia, 1989). As a result, sunflowerseed production has been characterized by a high degree of mechanization and, consequently, by relatively low costs per unit of output. Nevertheless, even if there is a high degree of mechanization and the size of the typical farm is relatively large, there is still a large number of farmers engaged in the production of sunflowerseed; therefore, the Spanish sunflowerseed supply could be considered practically as perfectly competitive. Perhaps the main factor explaining the expansion of sunflowerseed production in Spain, is the existence of agricultural and food policies aimed toward Spain's self sufficiency in vegetable oils. In the early 19603 the Ministerio de Agricultura, Pesca y Alimentacién (MAPA) tried to promote the production of safflower. However the introduction of safflower in Spain failed, due, in part, to the bad resistance of the crop to existing pests and diseases. The policy effort turned then toward the introduction of sunflowerseed. Sunflowerseed has a high yield of oil per seed. Seeds from the different sunflower varieties contain from 38% to 50% oil, and about 20% proteinfi The oil extracting’ process does not require advanced technology, and is relatively cheap. Moreover, the agronomic characteristics of sunflowerseed, and the fact that is highly resistant to 2From the sunflowerseed meal obtained in the extracting process. 20 Sunflowerseed Yields + Rain Fed Yield --l— Irrigated Yield 3000 2500 /K ]/;\\ 2000 I .- IO \ HM \ \tisoo - I) :2 V % 50° v ml 0 W l l T l l l l l l l i l l i l l l l l l l l l l l 1970 1975 1980 1985 1990 1995 Year Figure 2.3. Average Rain Fed and Irrigated Sunflowerseed Yields in Spain, Source: (1970-1995). MAPA. 21 dry'weather, make this crop very adaptable to the zones of Spain that have been traditionally specialized in cereal production. Because of the reasons mentioned so far, MAPA has pursued a policy tending to promote the production of sunflowerseed. This policy began in 1965 when a guaranteed price for sunflowerseed was introduced. Previous to that year sunflowerseed prices had been freely dictated by the market. The guaranteed price consisted in a minimum contractual price that SENPA established every year, and that the crushing industry had to pay to sunflower farmers. The crushing industry had the obligation of buying all the sunflowerseed that farmers offered, at the minimum contractual price. A monthly premium‘was added to this minimum contractual price. This premium intended to cover the storage costs in which farmers could incur since the harvest month. MAPA acted in two different forms to compensate the crushing industry for having to pay this minimum contractual price. First, FORPA had the obligation of buying, at a previously established acquisition price, all the unrefined sunflowerseed oil that the crushing industry was willing to offer. This oil was sold after by FORPA to the refining and bottling industry at the so called precio de cesidn, or selling price. Second, MAPA controlled all external trade in vegetable oils, and this helped to maintain the sunflowerseed oil prices at levels that could compensate the whole sunflowerseed oil industry for the high domestic sunflowerseed prices. A subsidy per kilogram of seed crushed was occasionally granted to the crushing industry, as part of the Spanish policy of self sufficiency in vegetable oils. The minimum contractual price policy established by MAPA held during the 1960s, the 1970s and part of the 1980s. In fact, the minimum contractual price policy could be regarded truly as an intervention price policy, shmilar'intmany aspects to the regulatory system that was utilized in the DC during these same years. The difference with the intervention price policy of the BC, was that MAPA did regulate but did not intervene 22 directly in the sunflower wholeseed market. Direct public intervention, with FORPA as a buying agent, took place only in the sunflowerseed oil market, where a true intervention price, the acquisition price, was established. On the other hand, prices in the sunflowerseed meal subsector were freely dictated by the market, and were very linked to the prices of soybean meal. Finally, the result of the minimum contractual price policy was a rapid expansion of the area planted with sunflowerseed in Spain; thus, sunflowerseed production became an important income source for Spanish farmers during the 1970s and the 19808 (Santana, 1986). When Spain joined the EC in 1986, the minimum contractual price policy was abandoned. Spain adopted the 30's normative framework and regulatory'mechanisms in the oilseeds subsector. The new policy introduced direct public intervention in the wholeseed market. Two types of institutional prices were set each agricultural year for sunflowerseed: a target price and a basic intervention price. A subsidy to the crushing industry, for the transformation of seed into oil was also established each year. Besides, during the 1986-1990 period, a system of export restitutions was introduced for the sunflowerseed oil that was directed toward the international market. In relation to the EC's institutional prices, the target price could be regarded as the one that would have been desirable to achieve, in order to support farmers' income. It was used as the base to compute the intervention prices, as well as the subsidy to the crushing industry and the export restitutions. The intervention price was the price that would be received by farmers if they decided to sell sunflowerseed under the system of public intervention; furthermore, at the established basic intervention price, EAGGF, through SENPA, had the obligation of buying all the sunflowerseed that farmers were willing to offer. Previous to Spain's adoption of the EC’s regulatory framework, {maaranteed prices were much higher in the EC than in Spain. Therefore, 23 during a transitional period of ten years Spanish target and basic intervention prices were supposed to converge progressively toward the levels prevailing in the EC-10. In practice, this approximation of intervention prices was performed only until 1991. This was because the reform of the oilseeds sector regulatory system, which, as noted, eliminated intervention prices, was put into practice in 1992. Farmers had to harvest a minimum quantity of 100 metric tons to be able to sell sunflowerseed to SENPA. If sunflowerseed was sold to SENPA three or more months after harvest, a monthly premium was added to the price. This premium‘was equal to an average of the storage costs, computed for the whole EC. Moreover, a maximum guaranteed quantity was fixed every year for Spain. In the case that the Spanish national production of sunflowerseed had exceeded that maximum guaranteed quantity, the target price and the basic intervention price for the following year would have been reduced proportionately, up to a pre-established downward limit. For all the other countries in the EC, except for Portugal, the maximum guaranteed quantity was fixed jointly. Thus, for the EC-10, all European producers were penalized if the total production of the EC-10 exceeded the maximum guaranteed quantity. 0n the other hand, due to the accession treaty signed in 1985, for Spain and Portugal the maximum guaranteed quantities were established separately, on a national basis. The establishment of separated maximum guaranteed quantities was supposed to hold during a transitional period of ten years (European Commission, 1986). During the six years that the intervention price policy was present in Spain, the Spanish production of sunflowerseed never exceeded the maximum guaranteed quantity that was pre-established every year (Junta de Andalucia, 1992). The same cannot be said about the EC-10, where the total production. exceeded frequently the’ maximum guaranteed quantity. For example, in 1991 there was a umximum guaranteed quantity for Spain of 1,411,800 metric tons, but the Spanish production was only of 1,025,494 24 metric tons. In that same year, production in the lC-10 was 48% higher than the maximum guaranteed quantity. The intervention price policy implied that, by world market standards, the 30's sunflowerseed oil industry had to pay relatively high prices for the sunflowerseed bought from SC farmers. A subsidy per ton of seed crushed was established to compensate the crushing industry. To have access to this aid, crushers had to buy domestically produced sunflowerseed at a price at least equal to the basic intervention price. During a transitional period of five years, the criteria to compute the subsidy was different for the 80-10, and for Spain and Portugal. For Spain, a subsidy of 2.5 pesetas per kilogram of sunflowerseed crushed was granted in 1986. For the next four years this aid increased annually in direct relationship to the upward adjustment of the Spanish target price to the EC-10 target price. In the lC-10, the subsidy per ton.of sunflowerseed crushed*was equal to the difference between the EC-10 sunflowerseed target price and the world price for sunflowerseed. Thus, the subsidies were significantly higher in the 80-10 than in Spain; however, during that period, the Spanish vegetable oils market was much more protected than the EC market and, therefore, in Spain sunflowerseed oil was sold at higher prices than in the sc-io. In 1991, the lC's criteria for computing the subsidy'was established also in Spain. The aid received that year by Spanish crushers was equal to the difference between the Spanish target price and the world price. Nevertheless, in 1991 the Spanish sunflowerseed target price was still lower than the lC-lO target price and, therefore, the subsidy that Spanish crushers received was also lower. In 1992, with the reform of the regulatory mechanisms for the oilseeds sector in the EU, the subsidy to the crushing industry was completely abolished. After Spain's accession to the EC the relative isolation of the Spanish oil markets from the rest of the world was still maintained, in order to protect the Spanish oil industry. For Spain, a number of special 25 protective market arrangements were established during a period of five years, from 1986 to 1990, in order to avoid potential disruptive effects, especially on the olive oil sector, of Spain's accession to the EC. This period was known as the stand-still period, and was characterised mainly by the institutional control of the amounts of vegetable oils commercialized in the Spanish market. On the other hand the direct public intervention in the sunflowerseed oil market, that accompanied the previous minimum contractual price policy, was abandoned under the lC's regulatory framework. The intervention price policy of the EC in the oilseeds sector, was put into practice for the last time in 1991. As noted elsewhere, a deep reform.of-the regulatory mechanisms of the oilseeds sector in the EU, was undertaken in 1992. The reform of the oilseeds sector, is part of a much broader reform effort that includes all arable craps (cereals, oilseeds and protein crops) under CAP. For arable crops in general, the new CAP has implied lower intervention prices and the reliance on direct deficiency payments per hectare, as a form of compensation to farmers. For oilseeds, and consequently for the sunflowerseed sector, the reform has gone much further. In fact, the new regulatory mechanism for oilseeds did eliminate intervention prices abruptly in 1992; on the other hand, the rest of arable crops under CAP have only experienced gradual, although sometimes significant, decreases in the real value of the intervention prices. Thus, in the oilseeds sector, intervention prices have been fully eliminated. Prices are now freely dictated by the market, just as back in 1964. The result is that the prices that farmers have been receiving for oilseeds since 1992 have been close to the world market levels (Campo Andalus, 1994). Nonetheless, farmers engaged in oilseeds production have also received much higher deficiency payments per hectare than farmers specialised in other arable crops (although, since 1993, the compensatory payments for other arable crops, such as cereals, have also grown at 26 considerably faster rates than the compensatory payments for oilseeds). These compensatory payments are granted per harvested hectare and determined on a regional basis, depending on the average regional yields obtained over a reference period (European Commission, 1992). Moreover, since world market prices are at much lower levels than the institutional prices traditionally guaranteed by the EC, after CAP reform sunflowerseed producers' gross revenues have depended mainly on the deficiency payments per hectare, and only marginally on the revenue obtained by selling sunflowerseed at the market price. Thus, on average for the 1992-1994 interval, around 80‘ of the average gross revenue of sunflowerseed producers in Spain, came from direct compensatory payments (Actualidad Agraria, 1994). For sunflowerseed, compensation per hectare involves two payments, one at the start of the marketing year and the other at the end. The mechanism to determine the total compensatory payment that a farmer engaged in sunflowerseed production will finally receive, is as follows. First, a reference price is established at the beginning of the marketing year. This reference price is not a politically established price, as the target price of the previous regulatory regime, but is computed as a function of an average of the prices of sunflowerseed and sunflowerseed oil in several markets of the EU, during the past marketing year. For example, for 1993 the initial reference price*was of 163 ECU/MT. The next step consists of establishing a payment reference amount. This reference amount is used to calculate the compensatory payments in the’different zones that produce sunflowerseed. For example, in 1992, 1993 and 1994, the reference amounts have been of 116.8, 118 and 124.4 ECU/HT, respectively. For 1995, the reference amount was fixed at 143.6 ECU/HT. The reference amount stays fixed during the marketing year, unless there is a substantial variation of the reference price. The compensatory payments that farmers receive vary for the different agricultural zones. Farmers whose land is located in highly productive zones receive higher payments per hectare than farmers whose 27 land is situated in low productivity areas. for Spain, there are two slightly different procedures to determine the territorial compensatory payments per hectare of sunflowerseed: one for rain fed production, and the other for irrigated production. The compensatory payments received by rain fed sunflowerseed producers are determined by multiplying the payment reference amount, by the average yields for rain fed cereals in each district or comarca (the Spanish equivalent to a county in the USA) during the reference period 1989-1991. These yields are not calculated on an individual basis and, therefore, are the same for all farmers whose land is situated on the same comarca. Thus, for example, in 1994, the reference amount was 124.4 ECU/MT. Therefore, a farmer that cultivated sunflowerseed, in a plot of land situated in a district, whose average rain fed cereal yield, for the established 1989-1991 reference period, was 3.2 metric tons of cereal per hectare, would have received a compensatory payment of 398.08 ECU per cultivated hectare in 1994. Obviously, Spanish farmers do not receive their deficiency payments in ECUs, but in pesetas. The final payment in pesetas, is determined by the value of the agricultural conversion rate of the ECU on the first of July of the marketing year’. Since on the first of July of 1994 the value of the agricultural conversion rate of the ECU was 192.319 pesetas, the farmer of the previous example would have received a payment of 76,558 pesetas per harvested hectare of sunflowerseed. For irrigated sunflowerseed, the procedure to determine territorial deficiency payments is practically the same, although in this case the final compensatory payment would be determined by the average district ’In 1992, there were different green rates for specific crops (for example, there were different green rates of the ECU for oilseeds and cereals). In 1993, the green rate system was abolished; consequently, in 1993 and 1994, the agricultural conversion rate of the ECU was the same for every crop, and was computedxmultiplying the value of the ECU on the first of July of each marketing year, by a conversion factor. In 1995, the conversion factor was abolished, and the agricultural conversion rate of the ECU in pesetas was just determined by the value of the ECU on the first of July. 28 yield for irrigated cereals, during the reference period 1989-1991. Of course, yields, and therefore payments per hectare, tend to be much higher for irrigated production than for rain fed production. Thus, for rain fed production the range of cereal yields used to determine the final payments has gone from 0.9 MT/Ha. to 4.3 KT/Ea., while for irrigated production the range covers from 4.0 HT/Ea. to 8.3 HT/Ha. At the end of the marketing year, before the second payment, the referencejprice’is computed again, following the same technical procedures as for the reference price utilized at the beginning of the marketing year. If theIdifference between the initial and subsequent reference price is above 8‘, the payment reference amount is readjusted. This can result in both lower and higher final compensatory payments to the farmers, depending on the sign of the difference between the final and ‘the initial reference (price. The readjustment is equal to the difference in percentage points between the final reference price and the upper (lower, if the final reference price is below the initial reference price) fluctuation bound for the initial reference price. In 1992 there was not any evidence of a significant change in the reference price during the marketing year, and therefore farmers received the whole second payment as it was initially established for the end of the marketing year. However, in 1993 the computed final reference price was of 193 ECU/HT. The initial reference price was 163 ECU/MT, and had an upper 8% fluctuation bound of 176 ECU/ET. Hence, the final reference price was 10t higher than the upper fluctuation bound. This resulted in a final payment reference amount 10‘ lower and, of course, in a 10$ decrease of the compensatory’payment granted to farmers (El Pais, 1993). This readjustment was performed at the time of the second payment to farmers, at the end of the marketing year. In 1994, an increase of the reference price also resulted in a 5% decreaserof the compensatory payment granted to sunflowerseed farmers. For 29 1995, no readjustments in the compensatory payments are expected due to changes in the sunflowerseed reference price. As noted elsewhere, during the intervention price regime, intervention prices were kept at lower levels for Spain than for the EC- 10. The reason for that situation was that the accession treaty of Spain to the EC, established a transitional period of ten years to adjust institutional prices in the oilseeds sector. Consequently, for 1992, 1993 and 1994, the payments reference amounts, and ‘therefore the direct payments per hectare, were kept at lower levels for Spain than for the EC- 10. Since 1995 onwards, deficiency payments per hectare will be kept at the same levels for Spain and the EC. In order to receive compensatory payments, farmers»must leave fallow each year a certain percentage of their land. The European Commission fixes this percentage every year, although it cannot be, in any case, below 10%‘. In 1992, that percentage was set at 15%, and was established in a rotational basis; consequently, the 15% of the land left fallow by a farmer in 1992, could not be used to fulfill set-aside requirements during the five following years. In 1993, the rotational set—aside was maintained at 15%, although from that year onwards, a non-rotational set-aside has been also authorized but at a higher rate (which in the specific case of 1993 was 20%). The non-rotational set-aside must be left idle during five consecutive years. In 1994, set-aside requirements were exactly the same as in 1993. Nonetheless, for 1995, EAGGF has reduced its set-aside conditions, requiring only a 12% rotational set-aside, or a 17% non-rotational set- aside (European Commission, 1994). From 1996 onwards, the rotational set- aside is expected to be 10% and the non-rotational set-aside 13%. EAGGF also grants compensatory payments for the land left idle in fulfillment of the land set-aside requirements. The mechanisms to ‘This minimum percentage was established in the EU-USA Blair House agreements. 30 determine these compensatory payments are exactly the same as for cultivated land. However, in the case of land left fallow, the reference amounts are much lower than for cultivated land. For 1992, 1993 and 1994 these reference amounts were 35, 45 and 57 ECU/MT, respectively. For 1995, the reference amount was set also at 57 ECU/MT. Besides, the payment reference amounts per idle hectare are the same for all arable crops. For example, in 1994, a farmer whose land was located in an agricultural district with a historical cereal yield equal to 3.2 MT/Ha., would have received a compensatory payment of 182.4 ECU for each hectare of sunflowerseed, or of any other arable crop, left idle to fulfill the set-aside requirements. There are some established limits to the compensatory payments that EAGGF grants to the EU farmers that plant sunflowerseed and. other oilseeds. As a matter of fact, Spanish sunflowerseed farmers face two sets of norms limiting the sunflowerseed area that can be planted in Spain. The first set of limitations is established in terms of all arable crops, that is, in terms of all cereals, all oilseeds and all protein crops planted in Spain. The second set of limits is specific for sunflowerseed production. In relation to the limitations established in terms of the area planted.with arable crops, the procedure is different for rain fed and for irrigated production. For rain fed production, EAGGF, through MAPA, establishes for each Spanish region or Comunidad Auténoma (the Spanish equivalent to a state in the USA), a maximum guaranteed area that can be planted with arable crops. This maximum guaranteed area is determined by the average of the hectares planted with rain fed arable crops in each region, during the 1989-1991 period. If in any given year, the acreage planted with rain fed arable crops in one region, exceeds thermaximum guaranteed area granted to that region, then the compensatory payments granted per hectare to all rain fed arable crops are reduced proportionately. The reduction is effective in the same marketing year, and takes place when farmers receive the second compensatory payment, at the end of the marketing year. 31 Thus, if the total area planted with rain fed arable crops in one region exceeds by 1‘ the guaranteed area for that region, then the established compensatory payments for the different arable crops in that region are reduced also by 1t’. Moreover, there is an additional penalization measure: for the next marketing year, farmers are required to reduce their planted area proportionally, in addition to the set-aside requirements, and without compensation. Thus, in the previous example, they would be required to reduce the area planted next year with arable crops by 1‘; however, this only affects farmers that did receive compensatory payments the year that the violation took place. So far, there has been very few cases in which the regional planted areas have exceeded the regional maximum guaranteed rain fed areas for arable crops in Spain. For the main regions in sunflowerseed production, Andalucia and, to a lower extent, Castilla-La.uancha, the rain fed acreage planted ‘with arable craps had never exceeded the regional maximum guaranteed area before 1995. For 1995, no penalization is expected in Andalusia and a small penalization is expected in Castilla-La Mancha. In relation to irrigated production, the limitation mechanisms are sbmilar ‘to 'those for rain fed production, although there are some differences exclusively peculiar to irrigated arable crops. First, for irrigated arable crops, the maximum guaranteed area is not established on a regional basis, but on a national basis for all Spain. As a matter of fact, two different national maximum guaranteed irrigated areas are established: one for irrigated corn and the other for the rest of irrigated arable crops. Irrigated sunflowerseed production is only affected by the second one. The second difference arises from the penalization procedure. For irrigated production of arable crops, the penalization consists in a 1.5t decrease of the compensatory payments, for each percentage point that the total irrigated acreage planted in Spain‘with arable crops, different from ’This reduction does not affect the compensation granted for fulfilling the set-aside requirements. 32 corn, exceeds the national maximum guaranteed area. However, this rule only applies if the planted acreage exceeds the maximum guaranteed area by 10‘ or less. If the planted area exceeds the maximum guaranteed acreage by more than 10‘, the penalization procedure changes: in this case, the compensatory payments for all Spain would be determined by territorial rain fed cereal yields, instead of by the higher territorial irrigated cereal yields. In any case, for the next marketing year, farmers in all Spain“ would be required to reduce their irrigated area planted with arable crops, different from corn, by the same percentage points that the planted national acreage exceeded the maximum guaranteed area; this is done apart from the set-aside requirements, and without compensation. In 1993, the area planted with arable crops, different from corn, was about 280,000 hectares higher than the established maximumxguaranteed area, that was of 716,779 hectares. In part, the cause of this situation was that 1993 was an extraordinarily dry year". Therefore, irrigation water was severely limited, and in many zones irrigated corn could not be produced. As a result, irrigation hectares that were planted traditionally with corn, were planted instead with other arable crops, especially with sunflowerseed due to its good resistance to dry weather. The European Comission accepted that this was an uncomon situation, and decided, exceptionally, to lower the degree of penalization for Spanish irrigated arable crops (ABC, 1993). Thus, the European Comission decided to compensate for the fact that the area planted with irrigated corn fell 240,000 hectares shorter from the maximum guaranteed area for irrigated corn, permitting to add, exceptionally, these 240,000 hectares to the maximum guaranteed area for the other arable crops. ‘Except those farmers that did not plant irrigated arable crops or that did not apply for compensatory payments the year that the violation of the rule occurred. ’This was aggravated by the fact that 1992 was also very dry. 33 The consequence was that EAGGF only reduced by 8.1% the compensatory payments to farmers producing irrigated arable crepe different from corn. Therefore, the irrigated production of sunflowerseed was only penalized by 8.1.. In relation to 1994, the area planted with irrigated arable crops exceeded again the maximum guaranteed area. In fact, for 1994, the sanction consisted in a decrease of 10.2t of the compensatory payments for irrigated arable crops (ABC, 1994). For 1995, no sanction is expected for irrigated arable crops different from corn. The second set of limitations refers exclusively to the total area planted with oilseeds, and more specifically with sunflowerseed, in Spain. Except for 1993, EAGGF has established every year a maximum area that can be planted with sunflowerseed, irrigated or rain fed, and that can be subjected to deficiency payments. Up to 1994, the maximum guaranteed area for sunflowerseed was settled on a national basis for all Spain. Thus, in 1992, a maximum guaranteed area, that could be planted with sunflowerseed and that could be subjected to compensatory payments, was established for the whole country. In 1993, there was no limit to the area that could be planted with sunflowerseed in Spain, apart from the general limitations established in terms of arable crops. Since 1994 onwards, EASGF has established again limits to the total area that could be planted with sunflowerseed in Spain. This is a direct consequence of the Blair'House agreement, signed by the EU and the USA in December of 1992, and, to some extent, of the final agreement on the Uruguay Round of the GATT, signed in December of 1993. On the other hand, the Uruguay Round does not consider that the direct payments per hectare to oilseeds producers in the EU are a cause of trade distortion, and, therefore, does not require a reduction of the compensatory payments levels. The obligations acquired by the EU in the Blair House agreement required that EAGGF reduced the area planted with oilseeds that could be subjected to compensatory payments (MAPA, 1993). Consequently, in 1994, 34 EAOOF established a gross maximum guaranteed area for the Spanish production of sunflowerseed of 1,441,000 hectares. Moreover, the Blair House agreement required that the rotational set-aside requirements (15‘ of total land, for 1994) had to be deducted from the gross maximum guaranteed area. This resulted in a net maximum guaranteed area of 1,200,000 hectares, which was the maximum area that Spanish farmers could plant with sunflowerseed in 1994, without being subjected to penalization. So far, for Spain, the maximum guaranteed areas for oilseeds have been established separately for sunflowerseed, rapeseed, soybeans and flax. Nonetheless, the guaranteed areas have been much smaller for the other oilseeds than for sunflowerseed, because the production of these other oilseeds in Spain is very small. Also, and as occurred with the maximum guaranteed quantities under the intervention price regime, for 1992 and 1994, the maximum guaranteed areas for oilseeds were fixed jointly for the EC-10, and separately, on a national basis, for Spain and Portugal. nevertheless, from 1995 onwards, and due to the finalization of the transitional period for the integration of the Spanish oilseeds sector into the EU, the maximum guaranteed area will be established jointly for all the EU-12 countries. This maximum.guaranteed area is also established jointly for all oilseeds (soybeans, sunflowerseed, rapeseed and flax). For example, the gross maximum guaranteed area for all oilseeds planted in the EU-12 was 5,128,000 hectares for 1995. This is equal to the average area planted with oilseeds in the EU during the 1989-1991 period. Due to the Blair House agreements, this gross maximum guaranteed area is expected to remain at the same level during the next years. Again, EU farmers will be allowed to plant only the net maximum guaranteed area. If sunflowerseed producers plant more hectares than they are allowed to do, they are subjected to penalization. In fact for each 1‘ that the sunflowerseed planted area exceeds the maximum guaranteed area, 35 the established deficiency payment per hectare planted with sunflowerseed is reduced by 1t'. Moreover, this reduction is effective for the same marketing year in which the acreage violation occurs, and takes place at the time of the second payment to farmers, at the end of the marketing year. Besides, this penalization can be combined with the penalties resulting from the violation of the limitations established in terms of arable crops. In 1992, the maximum guaranteed area granted to Spain was of 1,411,000 hectares of sunflowerseed’. For that same year, the final planted area was 1,449,104 hectares, only 2t higher than the maximum guaranteed area. At the end, for different reasons, such as inappropriate fulfillment of the set-aside requirements, the percentage of hectares that did not qualify for the payments was higher than 2%, and the full compensatory payment was granted to these hectares that did fulfill all the requirements (ABC, 1993). Therefore, no penalization was issued to sunflowerseed producers. In 1993 the area planted with sunflowerseed expanded dramatically, and.reached 2,064,200 hectares. There are several possible¢explanations to this huge increase. First, almost anyone could plant sunflowerseed: HAPA. did. not establish any qualifying requirements to receive the compensatory payments, as it was done later in 1994. Second, farmers were, and are, being paid for planting sunflowerseed but not for obtaining high yields per hectare, as it was done under the intervention price regime; deficiency payments proved to be attractive to farmers, and they could be obtained even with low inputs applications per hectare. And third, Spain was experiencing a very severe drought and, in many zones of Spain, 'Again, this reduction does not affect the compensatory payments received for fulfilling the set-aside requirements. ’The Blair House agreement had not been signed yet, and.it was not necessary to subtract the set-aside requirements from the maximum guaranteed area. 36 planting sunflowerseed proved to be the only viable alternative (Actualidad Agraria, 1993). In any case, perhaps the most important explanation for the large sunflowerseed areas registered after CAP reform is that the compensatory payments for the production of sunflowerseed were established at very high levels; consequently, and as it will be shown later in this dissertation, farmers could expect significantly higher gross margins in the production of sunflowerseed than in the production of other competing crops, such as cereals. The result has been that, after CAP reform, sunflowerseed has tended to be massively planted in Spain: it has even been heavily planted in regions of Northern Spain, where the production of sunflowerseed has never been a traditional alternative to cereal production. Moreover, in 1993, there was little risk of being penalized for planting sunflowerseed per se, since a national maximum guaranteed area for sunflowerseed was not established. In fact, for that year, there were only two possible sources of penalization: one possible penalization due to an increase in the reference price of sunflowerseed, and the other due to potential penalties set in terms of arable crops. In fact, in 1993, sunflowerseed deficiency payments suffered a 10% penalization due to the increase in the reference price for sunflowerseed. Furthermore, farmers producing irrigated sunflowerseed experienced an additional decrease in their deficiency payments. As noted, this was because the total area p1anted.with irrigated arable crops, different from corn, was larger than the national maximum guaranteed area for irrigated arable crops, different from corn. Thus, in 1993, the rain fed production of sunflowerseed was subjected to a 10% penalization, while the irrigated production of sunflowerseed was subjected to a 18.1% penalization. In 1994, due to the establishment of a net maximum guaranteed area of 1,200,000 hectares, Spain could, not afford. to jplant. a so large sunflowerseed acreage as in 1993. If that had been the case, Spanish sunflowerseed producers would have experienced a very severe penalization. 37 To prevent this situation, HAPA established some rules that introduced qualifying requirements for those farmers who intended to receive compensatory payments per hectare planted with sunflowerseed. These rules have been present in 1994 and 1995 and have proven as very effective policy instruments in containing the growth of the sunflowerseed area.in.Spain. Furthermore, the same restrictions that.were.established in 1994 nd 1995 are expected to hold for 1996 also. Thus, to qualify for compensatory payments in sunflowerseed, Spanish farmers must accomplish the following requirements. First, if they plant rain fed sunflowerseed their land must be located in a comarca with assigned rain fed cereal yields above 2 HT/Ha. Farmers who planted sunflowerseed during the period 1989-1991 are not affected by this norm. Second, they must plant a minimum established dosage of certified hybrid seed. So far, therminimum application of certified hybrid seeds has bee 2.5 Eg/Ha for rain fed sunflowerseed production and 4.5 Eg/Ha for irrigated sunflowerseed production. Third, if farmers want to receive compensatory payments, they can only plant up to 50‘ of their land with sunflowerseed, once the set-aside requirements are fulfilled; they can only plant the rest of the land with other arable crops different from sunflowerseed. For example, if in 1994 a farmer had 100 hectares, and followed a rotational land retirement pattern, then he would have had to dedicate 15 hectares to fulfill the land set-aside requirements, he could have planted up to 42.5 hectares with sunflowerseed, and in the remaining 42.5 hectares, he could have only planted other arable crops different from sunflowerseed. And fourth, an perhaps most important, if a hectare planted with an oilseed receives compensatory payments in any given year, this hectare cannot be'plantediwith sunflowerseed the next year. Thus, in 1994, farmers could not plant sunflowerseed on the hectares that they planted with oilseeds (sunflowerseed, soybeans, rapeseed and flax) in 1993, and still receive compensatory payments. 38 As a result of these measures, the area planted with sunflowerseed decreased to 1,349,242 hectares in 1994. However, this area was still larger than the net maximum guaranteed area for sunflowerseed. In part, this could have been motivated because 1994 was also a very dry year. As a consequence of this situation EAGGF penalized farmers, reducing by 4% the established deficiency payments”. Since the penalization due to an increase in the reference price for sunflowerseed was 5%, then the total penalization for the production of rain fed sunflowerseed, in 1994, was equal to 9% of the deficiency payment. Moreover, for irrigated sunflowerseed, this penalization was around 19.2%. This was because the area planted with irrigated arable crops, different from corn, exceeded the national maximum guaranteed area for irrigated crops, different from corn, by about 6.8% (ABC, 1994). As noted, for 1995 a gross maximum guaranteed area of 5,128,000 hectares has been established jointly for all farmers planting oilseeds in the EU—12. A net maximum guaranteed area of about 4,500,000 is obtained after'deducting’the'12%.rotational set-aside requirement. According to the law, if the total area planted with oilseeds in the EU-12 exceeds the net maximum guaranteed area by 5% or less, then all farmers planting oilseeds in the 80-12 would be penalized jointly. Nonetheless, a 5% decrease in the compensatory payments is the maximum penalization that would be shared jointly by the EU-12. If, in any given year, the total area planted with oilseeds in the EU exceeds the maximum guaranteed area by more than 5%, then the decreases in the compensatory payments superior to 5%, would be concentrated only on those countries which plant an oilseeds area higher than the average acreage that was planted, in these countries, over the period 1989-1991. ”Although the final planted area was 12% higher than the net maximum guaranteed area, the established compensatory payment declined only by 4%. This was because a portion of the planted area did not fulfill the requirements that HAPA established to qualify for the compensatory payments. 39 In fact, for 1995 the total acreage planted with oilseeds in the EU- 12 has been below the net mmximmm guaranteed area. Therefore, Spanish farmers have not been penalized for that concept. Horeover, in 1995 Spanish sunflowerseed producers have not been penalized for increases in the reference price. Furthermore, as noted, there have been no penalizations in terms of irrigated arable crops for all Spain, and in terms of rain fed arable crops there have been no penalizations for the main sunflowerseed producer regions. Therefore, for 1995 Spanish sunflowerseed producers are expected to receive the full compensatory payment. II.a.2. Sunflowerseed Oil and Heal Production. Sunflowers are primarily grown to be crushed and to produce vegetable oil. The production of sunflowerseed meal is also relevant. Nonetheless, the dynamics of the sector can be understood much better in terms of sunflowerseed oil production, being sunflowerseed meal only a by- product that results after the oil extraction process. The impressive growth in the production of sunflowerseed in Spain, has beenxaccompanied.by’a parallel expansion in the domestic production of sunflowerseed oil and sunflowerseed meal. In 1975, Spain produced 165,000 tons of sunflowerseed oil and 198,000 tons of sunflowerseed meal; these amounts augmented to 375,000 tons of oil and 425,000 tons of meal in 1985. In 1994, 455,000 tons of sunflowerseed oil and 506,000 tons of sunflowerseed meal were produced in Spain (MAPA, 1995). The value of processing is mainly from the output of oil. Ten tons of sunflowerseed usually yield around 4.3 tons of oil and about 4.9 tons of meal. The oil content of sunflowerseed tends to be fairly stable, although has increased slightly over the years. Moreover, the price of sunflowerseed oil has always been significantly higher than the price of sunflowerseed meal. For example, in 1988 the wholesale price for refined sunflowerseed oil was 159.39 pesetas per liter, while the average price paid by farmers for sunflowerseed meal 40 was only 24.66 pesetas per kilogram. Therefore, although the oil yield is below the yield of meal per ton of crushed sunflowerseed, oil is the most valuable product obtained from the processing of sunflowerseed. In Spain, the sunflowerseed oil industry could be subdivided into three industries, according to the different vertical stages of production in the food chain. These industries are the crushing industry, the refining industry and the bottling industry. The crushing industry has its origins in the cotton processing industry, and to a lower extent, in the olive oil industry and in the soybean processing industry. The refining industry has its origins in the olive oil industry and in the soybean processing industry. Finally, the bottling industry has its origins in the olive oil industry (Cejudo, 1980). Historically, the main activity of the cotton industry has been the textile processing of cotton. However, in the 1950s, the cotton industry, also'developed plants that specialized in the production of cottonseed oil as a complementary activity. The amount of cottonseed crushed in Spain experienced an important increase during the 1950s, and reached a maximum quantity of 170,000 metric tons in 1962. However, after 1962 the amounts of cottonseed crushed declined progressively. This created.excess capacity in the cottonseed oil crushing industry, and induced, in thetmid 1960s, the adaptation of the industry to the processing of the newly introduced sunflowerseed. Over the years, this modification of the cottonseed oil industry, has resulted in the development of a relatively large number of plants specializing exclusively in the crushing of sunflowerseed. Moreover, since 1962 Spain.has imported largelquantities of soybeans for use as livestock feed. As a consequence, Spain has developed a soybean industry with few processing plants but with a relatively large crushing capacity. Soybean processing plants are mainly located near important seaports, where the imported soybeans are delivered. Although the main function of the soybean industry has been the crushing of soybeans for the production of soybean meal and soybean oil, the industry has also 41 specialized, as a complementary activity, in the crushing of sunflowerseed. Most sunflowerseed oil is obtained using solvent based technology (Baquero, 1988). Nonetheless, part of the sunflowerseed oil produced in Spain is also obtained by means of extruder/expeller processing. The origin of this second type of technique comes from the olive oil industry, and more specifically from the procedures that some olive oil processing plants have developed to produce orujo oil (aceite de orujo). The orujo oil is a low quality type of olive oil, that is obtained in a second crushing, from the refuse of the olives that is left after the first crushing process. During the early 19803 there were around 30 sunflowerseed crushing plants in Spain. The number of crushing plant is smaller today. Small scale crushing plants have disappeared from the market, and in general, it could be said that a minimum production of 100 metric tons of oil per day is necessary for a plant to be profitable. In 1991, there were only 23 sunflowerseed crushing plants in operation, and their average crushing capacity was of 6,650 metric tons of seed per day (MAPA, 1992). Although the number of crushing plants has decreased during the last years, there is still excess capacity in the crushing industry. The result is a relatively high degree of competition among crushing plants, that, historically, has permitted farmers to receive prices above the minimum levels guaranteed by MAPA. Around 50% of the crushing industry is financed with foreign capital. Sunflowerseed oil cannot.be¢directed toward human consumption unless it is previously refined. During the 19503 Spain imported substantial quantities of crude soybean oil. As a consequence, some soybean oil refining plants were established in Spain. During the 1970s, the consumption of soybean oil decreased significantly, and these plants were adapted to refine sunflowerseed oil. Moreover, since the 1970s, the olive oil industry has also refined sunflowerseed. oil as a complementary activity. 42 The bottling industry performs the functions of bottling the oil and distributing it to wholesalers and to retail chains. In this industry, the growth of the hmportance of foreign capital has been very important during the last ten years. The Italian food multinational Ferruzzi is the group with the highest presence in the sector. The degree of vertical integration is very high between the refining and the bottling industry. On the other hand, there is still little vertical integration between the crushing and the refining industry, even if integration between these industries has been augmenting progressively during the last few'years. In 1991, only around 10% of the crushing plants performed refining and bottling activities (MAPA, 1992). As noted elsewhere, the different agricultural policies that have tried to promote the production of sunflowerseed have also had an effect on the sunflowerseed oil industry. Up to 1992, the main effect of the minimum contractual price and the intervention price policies was that the industry had to pay higher prices for sunflowerseed than those prevailing in the international market. Nevertheless, different measures served to compensate the industry for having to pay relatively high sunflowerseed prices. These measures included, the public intervention in the sunflowerseed oil market up to 1985, the state control of trade in oils up to 1990, and the subsidy granted to the crushing industry from 1986 to 1991. Since 1992, the industry has been paying sunflowerseed prices approximately equal to those prevailing in the world market, and therefore, MAPA has abolished all compensatory measures to the industry. II.b. Consumption. Most sunflowerseed produced in Spain is crushed to produce sunflowerseed oil and sunflowerseed meal. Only a very small proportion of the sunflowerseed produced is directed toward other uses. Thus, part of the crop is reutilized in the farm as seed. This means that although most of the seeds planted are hybrid seeds, some proportion of the harvest is still replanted. Besides, some sunflowerseed is utilized 43 directly as livestock feed. Finally, a small proportion of the sunflowerseed produced corresponds to non oil varieties that are suited for human consumption. For example, in 1992, after deducting net trade and stock variation from the resulting production, around 1,330,000 tons of sunflowerseed were available in the Spanish market; of that quantity, 984 was crushed, 1.3t went into human consumption, 0.6t was reutilized as seed, and only around 0.1; ... used as livestock feed (243915, 1993). The growth of sunflowerseed oil and sunflowerseed meal consumption in Spain, has been parallel to the development of sunflowerseed production. Thus, in 1973 the human consumption of bottled sunflowerseed oil in Spain was of 98,000 metric tons, while the livestock sector used 114,000 tons of sunflowerseed meal. In 1983, 267,000 tons of bottled oil and 334,000 tons of meal were consumed in Spain. In 1992, the consumption of bottled sunflowerseed oil was 312,000 tons, and the consumption of sunflowerseed meal was 580,000 tons (MAPA 1993; AFOEX 1993). II.b.l. Sunflowerseed Oil Consumption. The major use of sunflowerseed oil is as cooking oil. Besides, virtually all sunflowerseed cooking oil is sold bottled. However, there are also other uses for sunflowerseed oil. A relatively small proportion of total sunflowerseed oil consumption is used as a raw material by the food processing industry, in the production of food items such as canned vegetables, canned fish, margarine, mayonnaise, etc. Before Spain's accession to the EC, the use of sunflowerseed oil by the food processing industry tended to be fairly mmall. Thus, on average for the 1973-1985 period, only 7% of all sunflowerseed oil consumed in Spain was utilized by the food processing industry (MAPA, 1987). However, accession to the EC has encouraged the production of sunflowerseed, and consequently the production and utilization of sunflowerseed oil. As a result, during the 1986-1993 period, a higher 44 proportion of total sunflowerseed oil consumption has gone into food processing. On average for the 1986-1993 period, 14‘ of all sunflowerseed oil consumed in Spain was utilized by the food processing industry (MAPA, 1994). Sunflowerseed oil can also go into inedible uses, such as the production of cosmetics, paints and soaps. The sunflowerseed oil that has a high degree of acidity, and that is not suited for human consumption, is directed toward ‘these inedible uses. Generally, only’ a very' small proportion of the total sunflowerseed oil consumption in Spain goes into inedible uses. For example, on average for the 1980s, only 1t of all sunflowerseed oil consumed in Spain went into inedible uses (MAPA, 1991). The production of sunflowerseed, and to a much lower extent of sunflowerseed oil, are subjected to a relatively high degree of variability from year to year. However, the consumption of sunflowerseed oil has followed much more stable trends over the years, and is not subjected to sharp annual variations. Furthermore, since the late 1970s, sunflowerseed oil has been the second vegetable oil most consumed in Spain, after olive oil. Traditionally, Spain has always been an olive oil consuming country. For hundreds of years olive oil was the only vegetable oil consumed in Spain. However, in the late 1940s, and’)/N1-’ [mm - «13%/NJ"s [(z.<- Fifih Scenario -A— Cross from Markei Figure 6.2. Projected Average Compensatory Payments for Rain Fed Wheat, under the Different Scenarios, (1996-2005). 253 Spanish sunflowerseed producers are very unlikely to be penalized at the end of the projection period. Therefore, the relatively large wheat compensatory payments levels projected under the second scenario lead to a significant moderation on the Spanish sunflowerseed acreage, especially toward the end of the projection period. In any case, the recommendation of maintaining MAPA's restrictions during the early years of the projection period, stills holds in this second scenario. The Spanish production and utilization of sunflowerseed under the second scenario is presented in Table 6.6. In this case, the Spanish production of sunflowerseed is also expected to decrease at the end of the projection period, although much more moderately than the sunflowerseed acreage. This last result can be explained because the decrease in the rain fed sunflowerseed area is partly compensated with increases in the irrigated sunflowerseed acreage, which implies higher average yields per hectare. Furthermore, the volume of trade in sunflowerseed tends to remain at low levels also under the second scenario, just as in the first scenario. However, in the second scenario Spain is expected to import slightly higher quantities of sunflowerseed at the end of the projection period. Table 6.7 shows that, under the second scenario, there is a slight moderation in the amounts of sunflowerseed oil produced, although Spain is still expected to remain a net sunflowerseed oil exporter during all the projection period. There is less accumulation of sunflowerseed oil stocks under the second scenario; consequently, the sunflowerseed oil ending stocks reach more modest levels, and are projected to be around 134,000 metric tons in year 2005. Finally, the balance sheets projections for sunflowerseed meal are summarized in Table 6.8, and also indicate'a.moderation in the projections for sunflowerseed meal domestic production, as well as an increase in the amounts imported of sunflowerseed meal. 254 II.c. Thigd Scenario. The third scenario assumes moderate increases in the sunflowerseed and idle land reference amounts. On the other hand, this scenario still presumes relatively substantial increases in the wheat reference amounts, which is plausible given the present low compensatory payment levels currently granted in the production of rain fed wheat, and the expected future decrease in the nominal value of wheat intervention prices. More specifically, this ‘third scenario ,assumes ‘that 'the sunflowerseed and idle land reference amounts will grow at a 5% rate, while the wheat reference amount will grow at a 20% rate, during all the years of the 1997-2005 projection period. The results of the acreage projections under the third scenario are summarized again in Table 6.5. The sunflowerseed areas projected under the third scenario tend to be below the acreage projections under the first scenario and above the area projections for the second scenario; however, the decrease in the rain fed area and the increase in the irrigated acreage that occur at the end of the projection period tend to be more moderate than in the second scenario; hence, the third scenario leads to more equilibrated results at the end of the projection period than the second scenario. Obviously, the recommendation of maintaining MAPA's restrictions, during at least some of the years of the 1998-2002 period, also holds in the third scenario. Moreover, the comparison of the acreage projections under the first, the second, and the third scenarios indicates that a moderation in the growth rate of the wheat reference amounts should be accompanied by very low growth rates in the sunflowerseed reference amounts. Otherwise, the compensatory payments and gross margins received in the production of rain fed sunflowerseed would be very attractive if compared with the gross margins obtained in the production of rain fed wheat, even if both decrease in absolute levels; this could lead to 255 Table 6.5. Projections of Sunflowerseed Area in Scenarios II and (1996-2005). Year Rain Fed Irrigated Total Area Area Area Scepagio 1; (Ha.) 1996 653,797 131,091 784,888 1997 992,692 154,154 1,146,846 1998 1,191,430 174,492 1,365,922 1999 1,288,534 194,165 1,482,699 2000 1,243,405 214,016 1,457,421 2001 1,099,506 234,120 1,333,626 2002 885,272 255,874 1,141,146 2003 582,849 278,543 861,392 2004 200,000 302,930 477,790 2005 200,000 329,045 529,045 Scenapio ii; (Ha.) 1996 653,797 131,091 784,888 1997 996,807 150,989 1,147,795 1998 1,208,660 165,545 1,374,205 1999 1,333,467 177,178 1,510,645 2000 1,337,465 186,948 1,524,413 2001 1,271,466 194,526 1,465,992 2002 1,173,923 201,845 1,375,768 2003 1,039,941 208,148 1,248,089 2004 868,701 214,171 1,082,872 2005 662,761 219,816 882,577 III 256 excessively large sunflowerseed acreages and to more probable penalizations to the Spanish sunflowerseed farmers. A second implication, from a longer term perspective, is that the reference amounts granted for wheat and sunflowerseed should grow at similar rates once similar gross margins levels are achieved in the production of rain fed sunflowerseed and rain fed wheat, as occurs in the first scenario around year 2004. The Spanish production and utilization of sunflowerseed under the third scenario are again presented in Table 6.6. In this case, the production of sunflowerseed tends to be at almost the same the levels that were attained under the first scenario, probably because a higher proportion of the sunflowerseed acreage is cultivated under irrigation. There is also a low volume of trade in sunflowerseed, as in the other scenarios. Table 6.7 shows that the quantities of sunflowerseed oil produced are similar under the first and the third scenario. The final ending sunflowerseed oil stocks are projected to be around 196,000 tons in year 2005. Moreover, under the third scenario the Spanish oil industry is also supposed to export significant amounts of sunflowerseed oil during most years of the projection period. The balance sheets projections for sunflowerseed meal are also presented in Table 6.8 and indicate that, as in the other scenarios, Spain will also be dependent on sunflowerseed.meal imports under the third scenario. II.d. gougth Scenario. The fourth scenario ;presumes ‘that the levels of institutional subsidies that EAGGF guarantees to arable crops producers will remain during the 1996-2005 period at constant nominal levels. Therefore, the fourth scenario assumes that, during the years of the 1997-2005 projection period, all the compensatory payments will remain at the same levels that EAGGF has announced for 1996. In this case, it is a subject of interest to consider the consequences of gradual declines in the real value of the actual 257 Table 6.6. Sunflowerseed Balance Sheet Projections in Scenarios II and III (1996-2005). Year Production Seed Other Net Crushed Uses Exports Mariel]; (MT)- 1996 706,850 858,757 18,600 -170,507 1997 1,006,378 1,074,475 23,272 -91,369 1998 1,208,979 1,228,923 26,617 -46,561 1999 1,337,927 1,328,100 28,765 -18,938 2000 1,366,596 1,351,437 29,272 -14,113 2001 1,323,320 1,319,708 28,584 -24,972 2002 1,229,912 1,249,862 27,072 -47,022 2003 1,072,827 1,131,656 24,511 -83,340 2004 830,496 949,421 20,564 -139,489 2005 924,369 1,020,988 22,114 -118,733 Sgepagio LII (MT). 1996 706,850 858,757 18,600 -170,507 1997 1,002,976 1,071,904 23,217 -92,145 1998 1,203,061 1,224,449 26,521 -47,909 1999 1,335,144 1,325,996 28,720 -19,572 2000 1,378,165 1,360,183 29,460 -11,478 2001 1,365,377 1,351,500 29,272 -15,395 2002 1,327,780 1,323,843 28,673 -24,736 2003 1,262,970 1,275,389 27,624 -40,043 2004 1,162,485 1,200,378 25,999 -63,892 2005 1,030,505 1,101,219 23,851 -94,565 258 Table 6.7. Sunflowerseed Oil Balance Sheet Projections in Scenarios II and 111 (1996-2005). Year Production Bottled Other Stock Variation Net Consumption Consumption Exports cc 11' (MT). 1995-1996 388,434“ 3 57,737 68,150 459.850 +3234? 1996-1997 360,071 347,503 66.191 ‘52’397 ‘13“ 1997-1998 452,054 348,750 66.429 '443 +3713” 1998-1999 517,912 350.386 66.740 ”3916 ”6:370 1999-2000 560,202 351,988 57,045 +31 ,146 +110,023 2000—2001 570,154 352,933 57,225 +23,984 +126,012 2001-2002 556,624 353,667 67,365 + 10,439 + 125,153 2002-2003 526,841 354,183 67.463 “41597 “09392 2003-2004 476,437 355,094 57,637 -22,550 +76,256 20042005 398,731 355,677 67,748 44,642 + 19,948 Sgenario fl! (MT). 1995-1996 388,434‘ 357,787 68,150 459,850 +32,347 1996-1997 360,071 347,503 66,191 -52.397 -1 .266 1997-1998 450,958 348,750 66,429 '353 +3515” 19984999 516,005 350,386 66,740 +23 ,333 + 75,544 1999.2000 559,305 351,988 67,045 +31 ,143 + 109,129 lam-2001 573,883 352,933 67,225 +25,735 4' 127,990 2001-2002 570,180 353,667 67,365 + 15,321 + 133,828 2002-2003 558,387 354,183 67,463 +5,454 +131,287 2003-2004 537,726 355,094 67,537 4,623 + 119,618 2004-2005 505,741 355,677 67,748 -15.443 +97,759 " "ism-1a] figures 259 Table 6.8. Sunflowerseed Meal Balance Sheet Projections in Scenarios II and 111 (1996-2005). Year Production Consumption Net Exports Sgenapio 11 (MT.) 1995-1996 436,600* 630,264 -193,664 1996-1997 397,060 648,705 -251,645 1997-1998 493,507 667,501 -173,994 1998-1999 562,561 686,219 -123,658 1999-2000 606,903 705,166 -98,263 2000-2001 617,338 723,933 -106,595 2001-2002 603,151 742,428 —139,277 2002-2003 571,923 760,950 -189,027 2003-2004 519,073 779,122 -260,049 2004-2005 437,596 797,190 -359,594 Scenagip II; (MT.) 1995-1996 436,600* 630,264 -193,664 1996-1997 397,060 648,705 -251,645 1997-1998 492,358 667,501 -175,143 1998-1999 560,561 686,219 -125,658 1999-2000 605,963 705,166 -99,203 2000-2001 621,248 723,933 -102,685 2001-2002 617,366 742,428 -102,062 2002-2003 605,000 760,950 -155,950 2003-2004 583,336 779,122 -l95,786 2004-2005 549,799 797,190 -247,391 *Historical figures 260 agricultural subsides, especially in a context where the internal pressures to reduce the relative, and even absolute, importance of the EU agricultural budget, could possibly be intensified in the future. Hence, this fourth scenario assumes constant nominal sunflowerseed and wheat compensatory payments during all the projection period, while the fifth scenario presumes nominal decreases in the different compensatory payments during the projection years. Although there is no clear evidence of a decrease in the real value of EAGGF's compensatory payments in the immediate future, the analysis performed under the fourth and fifth scenarios can provide insights on the potential effects of such a policy orientation, as well as on the relative importance of these effects. According to the fourth scenario, the sunflowerseed reference amount should be 167.75 ECU/MT for all the years of the 1996-2005 period. Similarly, the reference amount for wheat should be 54.34 ECU/MT for all the years of the 1996-2005 period. The reference amount for the land that is left idle to fulfill the set-aside requirements is also assumed to remain constant, at 68.83 ECU/MT, during all the 1996-2005 period. The sunflowerseed acreages projected under the fourth scenario are summarized in Table 6.9. As it can be seen, the acreage projections under this fourth scenario are higher than the sunflowerseed areas projected under any other scenario, even with much lower real compensatory payments in the fourth scenario than in the first three scenarios. The explanation of this result is that, although the real value of the compensatory payments granted in the production of rain fed and irrigated sunflowerseed decreases significantly, the real value of the compensatory payments for rain fed wheat remains at even lower levels: in fact, according to the fourth scenario, the average Spanish sunflowerseed producer should expect to obtain small negative gross margins in the production of rain fed wheat during the years of the projection period; as a consequence, land that otherwise would have been cultivated with wheat and, possibly, other cereals goes into the production of sunflowerseed. 261 Moreover, this result certainly stresses the important effects that the agricultural policy measures focused on the cereal sector have on the rain fed sunflowerseed acreage. This confirms that, perhaps, the most effective policy measure that EAGGF could adopt to contain the growth in the rain fed sunflowerseed acreage, and hence in the total sunflowerseed area in Spain, are relatively large growth rates in the wheat reference amounts, in. order to. equilibrate the compensatory payments in the production of rain fed wheat and rain fed sunflowerseed. Thus, lower sunflowerseed compensatory payments could result even in an increase of the sunflowerseed acreage, as long as these payments are more attractive than the compensatory payments granted in the wheat sector. The acreage projections of the fourth scenario also accentuate the recomendation of maintaining MAPA's restrictions, during at least some of the years of the projection period. As shown in Table 6.10, large acreage projections also result in a very large domestic production of sunflowerseed under the fourth scenario. The volume of trade in sunflowerseed is still small, although, in this case, Spain tends to become a net sunflowerseed exporter during most of the projection period. Furthermore, Table 6.11 and 6.12 indicate large domestic sunflowerseed oil and sunflowerseed meal productions, as a consequence of the rise in the amounts of sunflowerseed produced. The final sunflowerseed oil ending stocks are projected to be at very high levels (around 277,000 tons) in year 2005. Moreover, as a result of the sunflowerseed and sunflowerseed oil overproduction projected under this scenario, Spainiwould have to export substantially high quantities of sunflowerseed oil; otherwise, .the Spanish oil industry would have to accumulate sunflowerseed oil stocks beyond reasonable levels, or moderate significantly its sunflowerseeds purchases from sunflowerseed farmers. Hence, in such an extreme situation, and in the case that the oil industry failed to find external markets for its potential sunflowerseed oil surpluses, the Spanish sunflowerseed sector would have to become (if possible) a net exporter of significant amounts of sunflowerseed.. 262 Irriga’red Sunflowerseed Paymen’rs 300 .............................................................................. N (1" O 1 Pesetas per Heciore (Thousands) l l l 2000 2002 Year 1986 1988 + Baseline Scenario -+- Second Scenario + Third Scenario -5— Fourth Scenario —><- F ifih Scenario + Gross from Markel Figure 6.3. Projected Average Compensatory Payments for Irrigated Sunflowerseed, under the Different Scenarios, (1996-2005). 263 On the other hand, the balance sheet projections for sunflowerseed meal summarized in Table 6.12, show that, although Spain would still be a net importer of sunflowerseed meal, there would be a relevant moderation in this kind of imports, due to the large amounts of sunflowerseed meal produced domestically. II.a. :ifth Scenario. This last scenario assumes that all compensatory payments for wheat and sunflowerseed will be progressively reduced, over the 1997-2005 period, to half of their nominal values. Hence, in 2005 all the reference amounts will be at half of their announced nominal value for 1996. Thus, the fifth scenario assumes even more radical decreases in the levels of compensatory payments than the fourth scenario. Such decreases are very unlikely to occur in the short term; nonetheless, from a longer term perspective, a hypothetical future accession of the Eastern Europe countries to the EU could stress the necessity of reducing radically agricultural expenses, due to the tremendous costs that could have the application of CAP to these potential new entrants. In any case, the usefulness of this scenario relates to the comparative static nature of the study. Therefore, for comparison purposes, it is a subject of interest to analyze how the Spanish sunflowerseed sector could react, in the presence of sharp decreases in the current levels of compensatory payments related to the sunflowerseed sector. In relation to the fifth scenario, the average Spanish rain fed sunflowerseed producer should still expect positive gross margins in the production of rain fed sunflowerseed, as well as negative gross margins in the production of rain fed wheat, during the years of the projection period. Therefore, as can be noted in Table 6.9, the fifth scenario still results in very large sunflowerseed acreage projections; in fact, the projected sunflowerseed areas are only below the pmojections obtained Table 6.9. Projections of Sunflowerseed Area in Scenarios IV and V (1996— 2005). 264 Year Rain Fed Irrigated Total Area Area Area Scenario IV (Ha.) 1996 653,797 131,091 784,888 1997 1,015,362 147,640 1,163,002 1998 1,263,067 156,419 1,419,486 1999 1,441,053 160,503 1,601,556 2000 1,516,052 161,419 1,678,071 2001 1,535,377 159,706 1,695,083 2002 1,544,717 157,021 1,701,738 2003 1,542,435 152,812 1,695,247 2004 1,531,125 147,963 1,679,088 2005 1,517,537 142,485 1,660,022 Scenario V (Ha.) 1996 653,797 131,091 784,888 1997 1,007,319 143,919 1,151,238 1998 1,242,031 146,458 1,388,489 1999 1,404,105 142,641 1,546,746 2000 1,462,190 134,596 1,596,786 2001 1,465,917 123,837 1,589,754 2002 1,459,690 111,793 1,571,483 2003 1,441,790 98,157 1,539,947 2004 1,415,147 83,991 1,499,138 2005 1,386,731 69,429 1,456,160 265 under the fourth scenario. As in the fourth scenario, relatively low real sunflowerseed reference amounts result in a significant decrease in the irrigated sunflowerseed area; however, this decrease is more than compensated by a very important increase in the rain fed sunflowerseed area. Again, this result is explained because the compensatory payments granted in the production of rain fed sunflowerseed remain at much higher levels than the compensatory payments for rain fed wheat, even if the former -as well as the later- decrease significantly in absolute terms. Therefore, this outcome still emphasizes the necessity of considering the interdependence of the effects caused by policy measures that are not focused exclusively on the sunflowerseed sector. Table 6.10, Table 6.11 and Table 6.12 still suggest relatively large domestic sunflowerseed, sunflowerseed oil and sunflowerseed meal productions. Consequently, Spain will have to export relatively substantial amounts of sunflowerseed oil, although below the amounts projected for the fourth scenario. In the fifth scenario the sunflowerseed oil ending stocks are projected to be around 216,000 metric tons in 2005. Finally, as in the other scenarios, Spain is also projected to remain a net importer of sunflowerseed meal. To sum up, all the scenarios tend to project large sunflowerseed acreages in Spain during most years of the 1996-2005 period; therefore, it is very likely that, in the future, EAGGF will penalize the Spanish sunflowerseed producers if MAPA does not adopt restrictive measures to control the production of sunflowerseed. As noted in Chapter II and Chapter IV, the restrictions that MAPA has imposed in 1994 and 1995, and which will be applied also in 1996, have proven very effective in controlling the growth of the area planted with sunflowerseed in Spain: hence, in the near future, MAPA will still have to impose some restrictions on the production of sunflowerseed, probably similar to the limitations already in effect. 266 Table 6.10. Sunflowerseed Balance Sheet Projections in Scenarios IV and V (1996-2005). Year Production Seed Other Net Crushed Uses Exports chggrig IV (MT). 1996 706,850 858,757 18,600 -170,507 1997 1,009,382 1,076,746 23,321 -90,685 1998 1,223,394 1,239,819 26,853 —43,278 1999 1,378,417 1,358,707 29,428 -9,781 2000 1,455,465 1,418,616 30,726 +6,123 2001 1,486,066 1,492,731 31,248 +12,087 2002 1,507,712 1,459,857 31,619 +16,236 2003 1,521,717 1,470,981 31,860 +18,876 2004 1,521,987 1,472,133 31,885 +17,969 2005 1,517,076 1,469,028 31,818 +16,230 Scenario V (MT). 1996 706,850 858,757 18,600 -170,507 1997 996,306 1,066,862 23,107 -93,663 1998 1,188,011 1,213,072 26,274 -51,335 1999 1,314,468 1,310,367 28,381 -24,280 2000 1,358,575 1,345,375 29,140 -15,940 2001 1,356,856 1,345,059 29,133 -17,335 2002 1,344,037 1,336,132 28,939 -21,034 2003 1,321,681 1,319,770 28,585 -26,674 2004 1,285,564 1,293,417 28,014 -35,866 2005 1,244,411 1,262,914 27,354 -45,857 267 Table 6.11. Sunflowerseed Oil Balance Sheet Projections in Scenarios IV and V (1996-2005). Year Production Bottled Other Stock Variation Net Consumption Consumption Exports Scegm’ E (MT), 1995-1996 388,434‘ 3 57,737 68,150 459.850 +32,347 1996-1997 360,071 347,503 66,191 -52.397 4.266 1997-1998 453,023 348,750 66,429 -76 +37,920 1998-1999 522,558 350,386 66,740 +25,552 +79,880 1999-2000 573,253 351,988 67,045 +35,414 +118,805 2000-2001 593,799 352,933 67,225 +32,720 + 145,921 2001-2002 609,082 353,667 67,365 +25,248 + 162,802 2002-2003 616,385 354,183 67,463 + 19,266 + 175,473 2m3-2004 621,128 355,094 67,637 +14,153 +184,244 2004-2005 621,619 355,677 67,748 +9,303 + 188,891 chmg'o V (MT). 1995-1996 388,434" 357,787 68,150 “'35" +32,347 1996-1997 360,071 347,503 66,191 '52’397 ‘1’266 1997-1998 448,808 348,750 66,429 -1 .672 +35,302 1998-1999 511,154 350,386 66,740 +21,770 +72,257 1999—2000 552,641 351,988 67,045 +29,420 +104,187 2000-2001 567,568 352,933 67,225 +24,726 + 122,684 2001-2002 567,434 353,667 67,365 + 16,004 + 130,398 2002-2M3 563 ,627 354,133 67,463 + 8,931 + 133 ,049 2003-2004 556,650 355 ,094 67,637 +2.865 +131,054 2004-2005 545,413 355,677 67.748 '16” + ”44609 "‘ Historical figures Table 6.12. Sunflowerseed Meal Balance Sheet Projections in Scenarios IV 268 and V (1996-2005). Year Production Consumption Net Exports W (MT.) 1995-1996 436,600* 630,264 -193,664 1996-1997 397,060 648,705 -251,645 1997-1998 494,523 667,501 -l72,978 1998-1999 567,433 686,219 -118,786 1999-2000 620,588 705,166 -84,578 2000-2001 647,373 723,933 -76,560 2001-2002 658,155 742,428 -84,273 2002-2003 665,812 760,950 -95,138 2003-2004 670,786 779,122 -108,336 2004-2005 671,301 797,190 -125,889 chnario y (MT.) 1995-1996 436,600* 630,264 -193,664 1996-1997 397,060 648,705 -251,645 1997-1998 490,104 667,501 -177,397 1998-1999 555,475 686,219 -130,744 1999-2000 598,975 705,166 ~106,191 2000—2001 614,627 723,933 -109,306 2001-2002 614,486 742,428 -127,942 2002-2003 610,494 760,950 -150,456 2003-2004 603,179 779,122 -175,943 2004-2005 591,397 797,190 -205,793 *Historical figures 269 Comparing the different scenarios provides greater insight into the impacts of potential future evolutions of the CAP in the arable crops sector than simply examining the magnitudes of the predictions. The acreage projections in the different scenarios indicate that a moderation in the sunflowerseed reference amounts leads to lower irrigated sunflowerseed areas but not necessarily to lower rain fed sunflowerseed acreages: as it is shown in the last two scenarios, even low sunflowerseed referenceramounts could result in large total sunflowerseed areas, as long as the compensatory payments for rain fed sunflowerseed are significantly above the compensatory payments for rain fed wheat. Currently, the compensatory payments granted in the production of rain fed sunflowerseed are at notably higher levels than the compensatory payments granted in the production«of rain fed1wheat. The results obtained in the first three scenarios suggest that the reference amounts for wheat will still have to grow at relatively high rates; otherwise, Spanish farmers are likely to plant excessively large sunflowerseed acreages and, very possibly, would be subjected to penalizations if no restrictive measures are adopted. At the same time, it is not necessary to maintain the actual rates of growth for the sunflowerseed reference amounts; hence, it is possible to have a moderation in the growth of the compensatory payments granted in the production of sunflowerseed. Once the compensatory payments for rain fed wheat reach levels similar to the compensatory payments received in the production of rain .fed sunflowerseed, it could be advisable to moderate the growth rates of the wheat compensatory payments also. Consequently, the reference amounts granted for wheat and sunflowerseed should.grow'at relatively parallel rates, once similar gross margins levels are achieved in the production of rain fed sunflowerseed and rain fed wheat. These growth rates could even be at moderate levels, as long as they grant reasonable and positive gross margins in the production of rain fed and irrigated sunflowerseed and in the production of rain fed wheat. 270 Projected Sunflowerseed Area 1.8 1,5- ---------------------------- a ......................................... Hectares (Millions) 2000 2002 2005 Year 4 1 1996 1998 + Baseline Scenario -+- Second Scenario ->'<- Third Scenario -8- Fourth Scenario —><— Fifth Scenario Figure 6.4. Projected Sunflowerseed Acreages under the Different Scenarios, (1996-2005). 271 Moreover, if wheat and sunflowerseed gross margins reach similar levels at the end of the projection period, a moderation of the growth rate for the rain fed wheat payments could help to control increases in the EU agricultural budget and, besides, to avoid excessive decreases in the Spanish rain fed sunflowerseed area. In fact very large decreases in the sunflowerseed acreage should be avoided also, in order maintain an equilibrium.-necessary from an agronomic point of view- among the rain fed sunflowerseed and wheat areas in the main sunflowerseed producer zones of Spain. Furthermore, all the scenarios indicate that, during the projection period, Spain will tend to remain self-sufficient in sunflowerseed, and that there will be a small volume of trade in sunflowerseed in all the 1997-2005 interval, unless an unexpected bad harvest, in any given year, makes it necessary to import sunflowerseed. Finally, the different scenarios suggest that Spain is expected to export sunflowerseed oil and to remain a net importer of sunflowerseed meal during all the 1996-2005 period, although the volume of trade in these commodities varies among scenarios. CHAPTER VII SUMMARY AND CONCLUSIONS In 1992, the CAP mechanisms regulating the EU oilseeds sector experienced a radical reform that eliminated intervention prices in the oilseeds markets. As a consequence of that reform, the Spanish sunflowerseed prices declined abruptly, and EAGGF remunerated sunflowerseed producers establishing a compensatory system that grants substantial payments per sunflowerseed hectare. In 1993, the reform of the CAP was also applied to the cereal and other arable crops sectors. However, in this case, the reform has been much more gradual: intervention prices have not been fully eliminated, although, during the 1993-1996 interval, decreased in real terms; at the same time, in the 1993-1996 period, the compensatory payments per hectare granted in the cereal sector were at significantly lower levels than the compensatory payments granted in the production of oilseeds. Nonetheless, during that period, the reference amounts granted in the production of cereals also grew at higher rates than the reference amounts for oilseeds. This dissertation has tried to assess the impacts that potential future developments in the compensatory payments levels granted by EAGGF could have on the Spanish sunflowerseed sector. Accordingly, the study develops econometric'models that simulate the Spanish supply and demand in the sunflowerseed sector during the 19703, the 19803 and the first half of the 1990s. The analysis of supply at the agricultural level focuses on the estimation of sunflowerseed acreage and yield equations. Moreover, the study’ of the Spanish rain fed sunflowerseed supply is carried, out independently of the analysis of the irrigated supply. 272 273 Wheat is identified as the most important crop competing with the production of rain fed sunflowerseed in the main sunflowerseed producer regions; however, the analysis of the irrigated sunflowerseed supply does not take into account any competing crop, mainly because of the large number of possible alternatives that are available in this case. Furthermore, farmers' expectations about gross margins, in the production of rain fed and irrigated sunflowerseed, and in the production of rain fediwheat, are used as the main variables explaining the evolution of the sunflowerseed acreage in Spain. The utilization of gross margins allows the concentration of information on variable costs and gross revenues obtained from several variables -as for example, the compensatory payments granted by EAGGF-, and thereby conserves on degrees of freedom. Besides, in the particular case of the reform of the CAP in the sunflowerseed sector, the use of gross margins is especially justified: first, because, due to the reform of the CAP, the evolution of the Spanish sunflowerseed acreage cannot be explained with the use of sunflowerseed prices alone; second, because a lack of degrees of freedom prevents the analysis of the sunflowerseed area only in terms of the compensatory payments per hectare that are being granted since 1992; and third, because farmers have been able to reduce significantly their variable costs per hectare in the production of sunflowerseed in response to the decrease in sunflowerseed prices. The main difficulty that this study has encountered, for incorporating gross margins in the simulation of the Spanish sunflowerseed acreage, is the lack of official sources of data in Spain, providing representative variable costs in the production of sunflowerseed, or of any other crop. Therefore, part of this dissertation is devoted to construct variable costs, gross revenues and gross margins series for the production of rain fed and irrigated sunflowerseed, as well as for the production of rain fed wheat in Spain. Specifically, the variable costs series are constructed extrapolating information on variable costs provided by several case 274 studies that were available for years 1976, 1982, 1986, 1989, 1990 and 1994. Then gross margins series were computed utilizing the variable cost series thus constructed. The accuracy of the modelling results could be affected, somehow, by the quality of the data on costs of production here utilized. Inaccurate or unrepresentative data on variable costs of production could decrease, to some extent, the validity of the conclusions obtained in the econometric analysis of supply. The case studies utilized here are assumed to provide an accurate representation of the agricultural practices of the average sunflowerseed producer in Spain. Unfortunately, it is very difficult to determine their exact level of representativeness since they are based on individual farm studies and not in aggregated data. Therefore, in the future, it would be very desirable to have official sources of data providing detailed and up-to-date data on costs of production at the farm level; these data should be based on representative surveys for the entire nation. An immediate advantage of having official sources of data on representative costs of production would be to support and to facilitate studies as the one presented here. As noted, the 'variable acost series constructed. in ‘this study detected a significant decrease in the variable cost per hectare in the production of rain fed and irrigated sunflowerseed after 1992. This decrease has taken place abruptly in response to the radical decrease in sunflowerseed prices caused by the reform of the CAP. On the other hand, there is no evidence of appreciable decreases in rain fed wheat variable costs after CAP reform. Nonetheless, some decline in the rain fed wheat variable costs is possible in the future, due to the expected decline in the wheat real intervention and market prices. The potential extent and magnitude of such a decline is still unknown. Hence, the inspection of future studies relating rain fed wheat production practices to the evolution of wheat prices, during the 1996-2005 period, could be a subject of interest and a source of future research. 275 The econometric analysis of the sunflowerseed area confirms that the consideration of farmers' expectations about gross margins in the production of sunflowerseed and alternative crops can explain significantly’ the historical evolution. of the Spanish, sunflowerseed acreage. The specific analysis of the rain fed sunflowerseed area corroborates that rain fed wheat is an important alternative to rain fed sunflowerseed: consequently, farmers' expectations about gross margins in the production of rain fed wheat do influence significantly the Spanish sunflowerseed acreage. Moreover, different models were tested to account for the formation of farmers' expectations about gross margins. The estimation and validation results in the analysis of the sunflowerseed area suggest that farmers follow the same expectation model in the rain fed and in the irrigated production of sunflowerseed. Specifically, the econometric analysis of the rain fed and of the irrigated sunflowerseed acreage indicates that farmers form their expectations about gross margins according to the same rational expectation model; rain fed and irrigated producers form their planting decisions taking into account all the relevant information available at the moment: present institutional prices and subsidies, present variable costs and present information about past yields. Thus, the selected rain fed and irrigated acreage models suggest that sunflowerseed producers take MAPA announcements about institutional prices and subsidies as valid, and that farmers form their expectations in relation to these announcements, instead of basing their expectations in past patterns of real gross margins. Purthermore, the econometric analysis of the rain fed and irrigated sunflowerseed acreage indicates that the legal restrictions that MAPA imposed in 1994 and 1995 moderated significantly the growth of the sunflowerseed area. Besides, the irrigated sunflowerseed area equation denotes that shortages in the availability of irrigation water tend to induce increases in the Spanish irrigated sunflowerseed acreage. 276 The econometric analysis of the Spanish sunflowerseed yields corroborates that the decline in sunflowerseed prices has influenced meortant y rain fed and irrigated sunflowerseed yields. Other significant factors influencing sunflowerseed yields are weather and technological change. The analysis of the Spanish consumption of sunflowerseed, oil confirms that bottled sunflowerseed oil and bottled olive oil are substitute products. Moreover, the estimation results show inelastic own price, cross price and income elasticities for the demand for bottled sunflowerseed oil. The analysis of the Spanish sunflowerseed oil demand was made with the use of single equation techniques. A field for further research could be the application of demand systems to the simultaneous analysis of sunflowerseed oil consumption and olive oil consumption: thus, the demand system approach could provide insights not only on the consumption of sunflowerseed oil but also on consumption issues related to the Spanish olive oil sector. The econometric analysis of the sunflowerseed oil stock variation suggests that sunflowerseed oil stocks are the result of sunflowerseed oil overproduction rather than of producers' speculative behavior; according to the analysis, the accumulation of sunflowerseed oil stocks is positively correlated to sunflowerseed oil surpluses, and negatively correlated to existing sunflowerseed oil ending stocks. The analysis of the demand for sunflowerseed meal insinuates that the Spanish sunflowerseed meal consumption is well explained by sunflowerseed meal and soybean meal prices, and confirms that sunflowerseed meal and soybean meal are substitute products in the livestock feed market. An increasing trend in sunflowerseed meal consumption is also detected; if that trend continues, annual increases in the domestic consumption of sunflowerseed meal can be expected during the 1996-2005 period. 277 Moreover, the modelling of the sunflowerseed demand by the oil industry indicates that the amounts of sunflowerseed crushed by the industry are highly influenced by the domestic production of sunflowerseed, and by the Spanish sunflowerseed oil internal disappearance. Finally, the supply and demand models estimated in this dissertation are utilized to generate projections of the Spanish sunflowerseed acreage, and of the Spanish production, consumption and net trade of sunflowerseed, sunflowerseed oil and sunflowerseed meal for the 1996-2005 period. Net trade projections are deduced residually from the production and consumption projections. The projection process is done according to five alternative scenarios. The compensatory payments that could be paid per irrigated or rain fed sunflowerseed hectare and per rain fed wheat hectare, during the 1997-2005 period, are the only exogenous variables that are changed among the different scenarios. The 1996-2005 projections of all the other exogenous variables are identical under the five scenarios. Thus, alternative assumptions about the future’compensatory'payments levels granted in the sunflowerseed and wheat sectors result in different sets of projected sunflowerseed acreages, and of projected sunflowerseed, sunflowerseed oil and sunflowerseed meal productions; on the other hand the demand models' projections are relatively unaffected by the different scenarios. In any case, too many unanticipated events may develop during the 1996-2005 period; therefore, the projection results obtained under the different scenarios only intend to provide insights into potential inter- scenario changes and their relative importance, instead of their exact magnitude. The projection results confirm that sunflowerseed and wheat compete for rain fed land in Spain; thus, the compensatory payments levels that EAGGF grants in the production of wheat have a very significant influence 278 on the projected total Spanish sunflowerseed area, and specifically on the projected Spanish rain fed sunflowerseed acreage. The explosive increment that the sunflowerseed area has experienced in Spain during the 1992-1995 period can be very much explained because sunflowerseed reference amounts have beeniat much higher level than cereal reference amounts. Moreover, the forecast results indicate that there'will still be large sunflowerseed acreages in Spain, as long as compensatory payments, and hence expected gross margins, are at significantly higher levels for sunflowerseed than for wheat. In this context, the policy of the European Commission of establishing, during the 1993-1996 period, significantly higher growth rates for the cereal reference amounts than for the oilseeds reference amounts must be regarded as appropriate. Moreover, the projection results obtained in this dissertation suggest that it will still be necessary to maintain relatively high growth rates in the wheat compensatory payments, at least until expected gross margins in the production of rain fed wheat and rain fed sunflowerseed begin to reach similar levels, probably toward the early 2000s. Besides, the sunflowerseed acreage projections indicate that a moderation in the growth rate of the wheat reference amounts is not advisable unless it is accompanied by very low growth rates in the sunflowerseed reference amounts. Otherwise, the compensatory payments and gross margins received in the produCtion of rain fed sunflowerseed would be very attractive if compared with the gross margins obtained in the production of rain fed wheat. In any case, it would not be advisable, either, to have compensatory payments levels at significantly higher levels for cereals than for sunflowerseed, because this could induce monocultive practices that are not recommended from an agronomic point of view. Furthermore, the projections obtained under the different scenarios suggest that Spain will tend to remain self sufficient in sunflowerseed during the projection interval. A low volume of trade in sunflowerseed and 279 significant sunflowerseed oil exports are expected during the 1996-2005 period; on the other hand, Spain is expected to remain a net importer of sunflowerseed meal during that same period. All the projections developed in this dissertation, are made upon the assumption that the legal restrictions that MAPA has imposed on the Spanish production of sunflowerseed during the 1994-1996 period, will not be in effect during the years of the 1997-2005 interval; under such an assumption, large acreage projections are obtained in the five different scenarios. Thus, the projected sunflowerseed areas under alternative scenarios suggest that the Spanish sunflowerseed producers are very likely to be subjected to EAGGF's penalizations, especially during the late 1990s and early 2000s. Therefore, the re-imposition of MAPA’s restrictions to the production of sunflowerseed in Spain seems to be an advisable agricultural policy orientation, at least during part of the projection period (especially in the years in which sunflowerseed reference amounts are at significantly higher rates than the cereal reference amounts). In any case, from 1995 onwards the maximum guaranteed area for oilseeds is established jointly for all the EU countries. Therefore, the acreage projections presented in this dissertation can only provide rough approximations on the likelihood of future EAGGF's penalizations on the Spanish sunflowerseed farmers. Hence, it is not possible to determine exactly if the Spanish and other EU oilseeds producers would be penalized, in relation to the sunflowerseed areas projected for Spain in this study; in fact, the prospects of future penalizations for violations of the maximum guaranteed area for oilseeds would also depend on how oilseeds producers in other EU countries react to the compensatory payments levels that EAGGF will announce in the future. Therefore, a field for further research could be the application of the techniques developed in this dissertation to the analysis of the oilseeds supply in other EU countries. Of special interest could be the 280 inclusion of expectations about gross margins in the study of the supply of rapeseed in Germany, France and the UK, of the supply of sunflowerseed in France, and of the soybeans supply in Italy, due to the large impact that these countries have on the total EU oilseeds acreage. It is also worth noting that, in the EU, cereals and protein crops are converging to the market regime that is now prevailing in the oilseeds sector. Therefore, the application of the gross margins approach utilized in this dissertation to the analysis of the supply of different cereals and protein craps in the EU countries may be warranted. In the case of Spain, it would be of great interest to incorporate expectations about gross margins to the specific analysis of the supply of cereals, and especially to the supply of wheat and barley due to the large proportion of the Spanish rain fed acreage that is planted with these two crops. In particular, the variable cost series developed in this dissertation should facilitate the utilization of gross margins for the study of the rain fed wheat area in Spain. Finally, from‘the results of the present study it could be concluded that the future evolution of the compensatory payments levels, granted in the EU's arable crops sector, is going to have a highly significant impact on the Spanish sunflowerseed sector. The sunflowerseed sector is of great importance to the Spanish agriculture, and the issues suggested by the conclusions of this study could be utilized in the future orientation of the Spanish agricultural policy. LIST 0? REFERENCES LIST OF REFERENCES ABC. Daily periodical. Madrid. Various issues. Actualidad Agraria. Weekly periodical. Madrid. Various issues. AFOEX. gsredistrcas de Veetas de Acertes Vegetales. Asociacién Nacional de Industriales Envasadores y Refinadores de Aceites Comestibles. Madrid. Various years. Alba Ordbfiez, F. El Cultrvo del Giresel. 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