 Should private storage be subsidized to stabilize agricultural markets once price support schemes are removed? A General Equilibrium analysis applied to European reformsNo 330253, Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project Abstract: The stabilization of European agricultural markets, which was one of the initial objectives of the Common Agricultural Policy (CAP), is today questioned. Indeed, successive reforms have progressively replaced the price support scheme, initially setup by the CAP, by a system of payments more and more decoupled from production and prices. While still supporting agricultural incomes, this evolution tends to reconnect European to international agricultural markets, and so to expose European agricultural producers to market fluctuations they did not face in the past. Regarding this increase of European farmers’ exposure to market risks, more and more attention is being paid today to private risk managing instruments. Some of these instruments, including storage, already existed in the past but were not extensively used by agricultural producers, notably because of the existence of public price supports; althought, private storage behaviors, which derive from inter temporal arbitrages, can reduce price volatility and therefore stabilize markets (Makki, Tweeten, and Miranda, 1996). One can presume that, with the removal of the public price support, private storage will be more and more used on agricultural markets and will mitigate the increase of market volatility induced by this removal. There is however some limits to the use of private storage as a risk managing instrument. Anderson (1992) notably shows that the markets’ stabilization induced by stockholding behaviors is very sensitive to storage costs: a small decrease in storage costs can generate a huge decrease in price volatility. This raises the question as to whether there should be a public intervention on storage, either at the country level or, as proposed by von Braun and Torero (2009), at the world level. One way for governments to intervene on storage is to directly buy or sell stocks, so as to contain market prices within a band determined by a support price and a release price. This kind of mechanism has formerly been used by the European Union (EU) to keep agricultural prices above an intervention level and stabilize markets. However, according to Wright (2012), it is actually both theorically and practically unsustainable and expensive, and can even be destabilizing if it fails. Public stockholdings have actually proven to be very costly (Jha and Srinivasan, 1999). Furthermore, this mechanism generates a decrease of price volatility, which is a necessary condition for private storage to hold, and thus discourage private stockholdings (Glauber, Helmberger, and Miranda, 1989; Zant, 1997). In the United States (US) for instance, the removal, in 1996, of the public storage scheme in agricultural sectors led to an increase of the private storage activity and thus induced almost no changes in the volatility of agricultural prices (Lence and Hayes, 2002). Finally, these buffer stock mechanisms, which can have an impact on production decisions, turn out to be distortive and do not comply with the World Trade Organisation (WTO) rules. Another way for governments to intervene on private storage is to stimulate this activity by providing financial support to stockholders. In their study, where they compare different market stabilization programs, Glauber, Helmberger, and Miranda (1989) conclude that subsidizing private storage is the most cost effective way to stabilize market prices because storage subsidies can easily adjust to stochastic phenomena. However Choi and Meyers (1989) question these results, arguing that they do not account for the (positive) impacts of storage subsidies on production decisions. The issue of the impact of such subsidies on speculative behaviors should also be considered. Indeed, it has often been mentioned that the behaviors of some non rational speculators could destabilized markets (Ravallion (1987), for instance). Femenia (2010), using a dynamic Computable General Equilibrium (CGE) framework shows that, even if they are not fully rational, speculative behaviors tend to bring some stability to agricultural markets, and thus contradicts this assumption. One can however wonder about the new behaviors a storage subsidy could induce. Taking into account all agents’ behaviors, as can a CGE model do, to study the effect of storage subsidies thus seems important. Furthermore, as shown by Jha and Srinivasan (1999) greater price stability achieved through a government intervention does not necessarily imply greater welfare for economic agents: if the policy generates very high government costs the social welfare can decrease. Here again CGE models are the most appropriate tools to simulate these global welfare effects. Yet, whereas CGE frameworks are widely used to study the effects of agricultural policies, none of the aforementioned works dealing with private storage subsidies has been conducted using a CGE model. One of the main reasons is probably that, as pointed out by Wright and Williams (1988), studying the effects of market stabilization mechanisms requires a dynamic framework and, in the case of storage subsidies, the modeling of stockholding behaviors. Few CGE models display such characteristics. Among them is the inter temporal dynamic CGE model developed by Femenia and Gohin (2009) and Femenia (2010) which includes stockholding behaviors and can incorporate imperfect expectations. Our main objective in this paper is to simulate the impacts of a subsidization of storage costs, aimed at stimulating private storage at the world level, on markets fluctuations following CAP reforms, and to study the welfare effects of this public intervention. To do so, we use the aforementioned dynamic CGE model. We simulate the effects of a radical reform: the complete removal of the CAP in arable crops sectors; we then study the impacts of a subsidization of wheat storage costs at the world level. We find, as could be expected, that the CAP removal in arable crop sectors destabilizes European markets and tends to stabilize markets in the United States (US) and in the Rest of the World (RoW). Furthermore, the subsidization of private storage effectively boost the storage activity ; it generates welfare losses, but those are very limited compared to the world welfare gains arising from the CAP removal. However, the effects of this subsidy on market volatilities are contrasted: we find that some cases where crop markets are actually stabilized following the, but in other cases the opposite arises and markets are destabilized. To understand the factors influencing the signs of the effects of the subsidy on price fluctuations, we perform a logistic regression and show that those depend on the form of the agents’ expectations, and on the some distributional characteristics of the productivity shocks arising in the crop sectors. Namely, the more past information is taken into account by economic agents to take their decision, and the more the productivity shocks are negatively auto correlated, the more the storage subsidy is efficient in stabilizing the markets. In the next section we briefly recall the main features of the dynamic CGE model used. Then, we present the data used with a particular focus on the way the “standard” data have been modified to improve the modeling of the CAP instruments in arable crop sectors, we also present the policy scenarios that are simulated. The last section is devoted to the presentation of our main results. Finally we conclude. Keywords: Agricultural and Food Policy; Public Economics (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ags:pugtwp:330253 Access Statistics for this paper More papers in Conference papers from Purdue University, Center for Global Trade Analysis, Global Trade Analysis Project Contact information at EDIRC. |
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