Policies and Price Formation under the CU Scenario

Table A-8.3 of Annex 8 shows prices, price margins and policies under the CU scenario. The general assumptions made on the process of Turkish price formation in a situation wherein agriculture is included in the CU with the EU are discussed above in Sections 4.3.1 and 4.3.2. Specific assumptions made for price formation for each of the products covered are summarized in Table 8.6 and some cases are explained in detail below.

Cereals: For cereals the nominal intervention price is at €101. If inflation is taken into account this will be about €89/t in 2006 (in real 1997 €), which is below all world market price projections for cereals. As the EU is assumed to stay a net exporter of cereals, cereal prices in the EU will not be kept significantly above world market prices in such a situation, and the price in the EU and Turkey will be determined by the world market price and not by the intervention price.

Pulses, oil cakes, oilseeds, cotton lint: As the EU applies no tariffs, prices are assumed to be at world market level.

Tobacco: In an importing situation, Turkey would charge the EU tariff of about 15 percent for imports originating from third countries or import from the EU at a level of 15 percent above world market price. As the EU is a clear net importer of tobacco the assumption is made that Turkey would import from third countries. In the exporting situation no difference would occur with the non-EU scenarios, as Turkey already has free access to the EU market.

Sugar: The sugar price is assumed to be 10 percent below the projected EU intervention price in the exporting situation and 10 percent above the EU intervention price in the importing situation. This situation of market prices in individual EU member countries above or below the intervention price, depending on the net trade situation, has been observed in the past and is also assumed to be valid in the Turkish case.

Onions: For an exporting situation, prices are derived as for potatoes with a resulting increase of the export price of 7.0 percent. In an importing situation, Turkey would probably import from the EU, a major exporter of onions.

Therefore, the import price is also assumed to increase by 7.0 percent compared to the liberalization scenario.

Table 8.6: Assumptions on Policies and Price Formation under the CU Scenario

Product Assumptions Common wheat As liberalization scenario Durum wheat As liberalization scenario Barley As liberalization scenario Maize As liberalization scenario Chickpeas As liberalization scenario Dry beans As liberalization scenario Lentils As liberalization scenario

Tobacco Imports: EU tariff; exports: as liberalization scenario Sugar EU intervention price

Cotton As liberalization scenario Sunflower seed As liberalization scenario Soybeans As liberalization scenario Onions Dependent on EU tariffs Potatoes Dependent on EU tariffs

Table tomatoes Entry price: as liberalization scenario Tomato paste EU tariffs and prices

Total melon EU tariffs

Cucumbers Entry price: as liberalization scenario

Total peppers Imports: EU tariffs; exports: as liberalization scenario Apples Entry price: as liberalization scenario

Table olives Imports: EU tariffs; exports: as liberalization scenario Olive oil Projected EU price

Lemons Entry price: as liberalization scenario Oranges Entry price: as liberalization scenario Mandarins Entry price: as liberalization scenario Hazelnuts EU tariff

Table grapes Entry price: as liberalization scenario & EU tariffs Sultana grapes Imports: EU tariffs; exports: as liberalization scenario Tea As liberalization scenario

Milk Ex: as liberalization scenario; imports: fixed at EU intervention level Sheep meat EU market price

Beef As liberalization scenario Poultry As liberalization scenario Eggs As liberalization scenario

Sunflower seed oil Imports: EU tariff; exports: as liberalization scenario Sunflower seed cake As liberalization scenario

Soybean oil As liberalization scenario Soybean cake As liberalization scenario Cotton lint As liberalization scenario Cottonseed As liberalization scenario Cottonseed oil As liberalization scenario Cottonseed cake As liberalization scenario

Potatoes: In the importing situation, Turkey would charge the EU tariff (11.5 percent in 2006) for imports originating from third countries, of which the EU itself is an importer, or import at world market price level late potatoes from the EU, as the EU is an exporter of late potatoes. As imports of early as well as late potatoes have been observed for Turkey in the past, it is assumed that Turkey would charge an average tariff of 5.75 percent in an importing situation. For the exporting situation, the resulting price for Turkey is derived as follows. Turkish potato exports to the EU are currently tariff free except for the period 1 April through 30 June, in which the average MFN tariff of 11.5 percent is charged.

Without a CU, Turkey would also pay the MFN tariff in 2006 during this period.

If this tariff were abolished, Turkey's export price would increase by 11.5 percent in the period concerned. In addition, this would also raise Turkey's market price during the rest of the year as producers and consumers in Turkey would adjust to the new situation. Producers would shift resources to the period in which exports to the EU would become more favorable, and this would reduce supply during the rest of the year. Consumers would substitute some consumption in the period in which exports to the EU would become more favorable for consumption during the rest of the year; demand in that period would increase. As a result, the domestic price in Turkey would also increase in the period not directly affected by the EU tariff reduction. This effect, of course, is difficult to quantify. The approach adopted for this study is to assume the price effect to be the average of the total tariff reduction (11.5 percent) and the tariff reduction multiplied by the share of the year in which the tariff reduction does occur (11.5 percent * 3/12 (months) = 2.875). As a result Turkey's export price under the CU scenario is assumed to be 7.2 percent higher than under the liberalization scenario.

Tomato paste: In an importing situation, Turkey would import tomato paste from the EU, which is a major net exporter of tomato paste, at a price of 14.4 percent above world market level (MFN tariff). According to traders, the price received for paste destined for the EU is about €50/t higher than for exports to third countries. As 25 percent of Turkey's current exports go to the EU, the export price of Turkey is €37.5/t below the EU price. Turkey's export price under the CU scenario is therefore assumed to increase by €37.5/t versus the non-EU scenarios. This approach, however, may overestimate the advantage for Turkey because Turkish exporters were unable to make full use of the EU tariff free TRQ of 30,000 t of paste in the years 2000 and 2001.

Melons: In an importing situation, Turkey is assumed to apply the EU-tariff of 8.8 percent to imports from third countries, as the EU is a major net importer itself. As Turkish exports of melons are tariff free from 1 April to 15 June, and Turkey has never fully utilized its tariff free TRQ for the balance of the year, the export price is not assumed to be different from the non-EU scenarios.

Fruits and vegetables covered by the entry price system: table tomatoes, cucumbers, table grapes, apples, oranges, lemons, and mandarins: The abolition of the entry price system is assumed to have no effect on Turkish prices (see Section 2.2.3). In the case of Turkey being a net importer, the 2007 EU tariffs apply for imports from third countries.

In addition to the entry price system, table grapes are subject to the MFN tariff in the period from 1 May to 17 June and 1 August to 14 November. The average EU tariff for 2006 during this period is 16.7 percent. Export prices are derived like for potatoes. The expected increase in export price is (16.7 percent + 5/12 * 16.7 percent)/2 = 11.8. percent.

Peppers, sultanas, table olives: For all these products, the tariffs applied are WTO bound EU rates. In the exporting situation no difference would occur with the non-EU scenarios, as Turkey has already free access to the EU market.

Olive oil: The EU price projection for 2006 is below the Turkish domestic price in a free trade situation. Therefore world market prices would apply in Turkey, too. This is consistent with price comparisons made above (see Section 2.2.3).

On the other hand, Turkey exports significant quantities of olive oil to the EU at only partially reduced tariffs. This supports the assumption, that Turkey would gain from a CU. For this study the assumption is made that Turkey could export olive oil in a CU with the EU for a five percent higher price than outside the CU.

Hazelnuts: In an importing situation, Turkey would apply the EU MFN tariff of 3.2 percent to imports from third countries as the EU is a net importer. In an exporting situation, Turkey's export price would increase by 3.0 percent as this is the preferential tariff currently charged by the EU on Turkish hazelnut imports.

Milk: The Turkish wholesale price in a net export situation is assumed to be at world market level as the EU has a quota system and would probably not accept tariff free imports. In a net import situation, the Turkish import price is assumed to be 5 percent above the projected EU milk equivalent intervention price in 2006 deducted from butter and SMP intervention prices, and the quality margin is assumed to stay constant compared to the status quo scenario. In 2006 the first step of lowering the milk price as part of the Agenda 2000 process will have taken place. Another two reductions by 2008 are foreseen and a further reduction of 10 percent after that. In such a case the EU price would come closer to the world market price projected for this study.

Bovine meat: The EU replaced its intervention price system for bovine meat in July 2002 by a system in which the market price will be supported by private storage aid and border policies. Private storage aid can be opened if the market

price falls below 103 percent of the basic price of €2,224/t. In the year 2006 this will be €2,003, below projected world market prices. Furthermore, additional cuts in the basic price are proposed by the EU Commission in its Mid Term Review proposals. Therefore, beef prices are assumed to be at world market level.

Sheep meat: In an importing situation, the Turkish price is assumed to be at the projected level in Greece, and in an exporting situation it is assumed to be 10 percent lower.

Poultry and Eggs: EU prices for poultry and eggs are close to the world market level. Therefore world market prices are also applied in TURKSIM in the CU scenario.

Sunflower seed oil, soybean oil, cottonseed oil: For soybean and cottonseed oils, the EU is a clear net exporter. Prices are therefore assumed to be at world market level in the CU scenario. For sunflower seed oil the EU is a net importer at an average tariff of 8 percent. However, Turkey already has free access to the EU market under the preferential arrangements. Therefore, a CU would not change Turkey's export price. In an importing situation, Turkey would apply the EU tariff to imports from third countries.

9 R

P

S

In this chapter the main results are presented and discussed in a summarized form. Product-specific simulation results under all scenarios can be found in detail in Annex Table A-9.1. In many tables throughout this chapter, changes between scenarios are expressed in relative terms only. In most cases the status quo scenario (2006) is compared to the base situation (1997/99) in order to cover the effects of increasing supply and demand as well as projected changes in world market prices until 2006. The liberalization and the CU scenarios are then compared to the status quo scenario in order to depict the impact of policy parameters on model variables.

First, Subchapter 9.1 describes the development of prices, production, and consumption under the different scenarios. Subchapter 9.2 then depicts the effects on trade and Subchapter 9.3 describes welfare changes under the liberalization and the CU scenarios compared to the status quo scenario. In Section 9.3.3, when aspects of income distribution are discussed, some supplementary data on farm size, which is not part of the model output, is provided in order to analyze effects on income distribution among producers.

Finally, in Subchapter 9.4, the impact of reduced marketing margins and changes in the real exchange rate on model results is discussed.

9.1 Effects on Agricultural Prices, Production, and Consumption