Projections of product prices and revenues

The first bar of Figure 4.1 demonstrates price gaps between Polish and EU markets in 1997 for the selected products. In general, the gap tends to be higher for products with high farm milk content and low for the products with higher shares of non-farm cost components. The second bar of the figure depicts the benchmark prices arising from the Agenda 2000 price cuts, however, related to the Polish prices using the initial, 1997, RER. The third bar of the figure depicts the benchmark prices resulting from the Agenda 2000 price cuts and related to the Polish prices using the projected RER (under the Base scenario) in the year 2007.

4 Dynamic Comparative Advantages – Effects of Integration with the EU 101 Figure 4.1. Benchmark levels for alignment of dairy product prices, effects of Agenda 2000, under

the Base scenario and Technical Change, in real terms.

0

1997 1997, Agenda 2000 2007, Agenda 2000

Source: author’s estimates based on data and methods described in text.

The industry-level price gap and its projected development, weighted with the initial product structure of industry revenues, for Base scenario and Technical Change, are presented in Figures 4.2.

and 4.3. The industry revenue is expressed per ton of milk processed. The figures make it clear how significant the effect of macroeconomic development, and RER changes in particular, may be. They also show that, given the price cuts of the Agenda 2000 reform and the appreciating trend of the Polish currency, the policy alignment to CAP between 2004 and 2007 will give rise to relatively small increases in the real product prices and revenues.

Despite the policy harmonisation with the reformed CAP, the dairy real prices in 2007 and in several years later can be expected to decline below the 1997 level. Only for certain products including SMP, butter, fresh cheese, and creams will these declines be smaller. For other products, including such important items (in terms of the revenue share) as ripening cheese, yoghurts, casein, or ice-creams the declines may be more significant, reaching the magnitude of 20% (in the Base scenario). These product specific effects are attributable to: (i) factors which have diverged Polish 1997 prices from their free-market and perfect-competition level, (ii) factors which may have affected the EU prices in the 1997, like, for example, product-specific constraints on market policy related to the WTO commitments, or (iii) simply the lower marginal processing costs and high competitiveness of the EU producers in a specific product. Let us consider these effects in more detail.

4 Dynamic Comparative Advantages – Effects of Integration with the EU 102 Figure 4.2. Projections of revenues at industry-level at alternative price levels, 1997-2010, under the

Base scenario and Technical Change, in real terms.

0 200 400 600 800 1000 1200 1400 1600

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 PLZ/ton of processed

farm milk

Private with technical change Social, since 2004 Euro-social

World market equivalent, until 2003 social EU since 2005 Agenda 2000

Private 1997

Source: author’s estimates based on data and methods described in text.

Figure 4.3. Projections of revenues at industry-level, 1997-2010, under alternative macroeconomic scenarios and Technical Change, at private prices, in real terms.

0 200 400 600 800 1000 1200 1400 1600

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 PLZ/ton of processed

farm milk

Low-growth Base High-growth Private 1997 Constant RER Source: author’s estimates based on data and method described in text.

First, it is important to remember that initial price gaps, and hence the magnitude of projected changes in private revenues, are influenced by the policy and other price distortions in Poland, which

4 Dynamic Comparative Advantages – Effects of Integration with the EU 103 have been discussed in Chapter 3. Of the four products taken to product-specific DRC analysis only for yoghurt is the price gap significantly affected in this way – the detected divergence for butter, ripening cheese and SMP range between 0% and 3%, while the price enhancing divergence of revenues at industry-level amount to 8%.

Figure 4.4. Export subsidies of the EU relative to WTO commitments, average for the marketing years 1995-1998.

0 20 40 60 80 100

Butter SMP Cheese Other milk

products WTO commitment =

100

Subsidy outlay as the commitment share

Subsidised quantity as the commitment share

Share of subsidised exports

Source: WTO (1995-1999) and author’s calculations.

Second, among factors having affected EU prices in 1997, the EU WTO commitments with regards to export subsidy and market access deserve special attention. Figure 4.4 shows that already in the first years of UR GATT implementation export subsidy commitments have become constraining for market policies for cheeses and other dairy products. Consequently, the share of non-subsidised exports in the marketing year 1997/1998 reached as much as 24% for cheese and 18% for other dairy products compared to, respectively, 17% and 16% in the year 1995/1996. Therefore, the 1997 EU dairy prices for these commodities may have been depressed. These constraints are expected to gain in importance in the medium term not only because of implementing the remaining reductions in export subsidy agreed under the UR GATT, but also due to further reductions expected to be agreed upon in the new round of the WTO negotiations. In addition, merely due to the accomplishing of the UR GATT implementation, commitment on tariff binding may also become constraining for butter (Tangermann, 1999). The major conclusion for the projections on future output prices is that the detected relatively small price gaps for cheeses and several other products, which were observed in 1997, should not be interpreted as a temporary effect. As far as future price development is concerned, the rather optimistic medium-term forecast for the world market situation (e.g. FAPRI, 1999, OECD; 1998) seems to suggest that the pressure for price reductions due to the further increase in the WTO constraints may be (at least partly) offset by an upward trend in World market prices.

4 Dynamic Comparative Advantages – Effects of Integration with the EU 104 Last but not least, technical change may have a substantial effect on future price levels realised by Polish producers on the EU market. The assumption here of a 5% price decrease owing to the insufficient quality improvement (despite assumed technical change) may even be seen as a rather modest guess. Should the technical change not be realised, the projected price gaps for non-intervention products would be diminished compared to the magnitudes demonstrated in Figure 4.1.