Scenario for output prices

Although the exact date of Poland’s accession to the EU remains an open question, the projections most often expressed fall between 2003 and 2005. It is important for the scenario formulation that the moment of prospected accession can (more or less) coincide with the implementation of Agenda 2000 reform in the dairy sector. An early accession without a transition period would mean that Polish dairy prices would need to be fully adjusted to the EU price levels before the beginning of the EU’s price reduction (i.e. in a case of accession before 30.06.2005) or before the full accomplishment of the reductions (i.e. in a case of accession between 01.07.2005 and 30.06.2007). Because of this uncertainty a working assumption is applied here, namely, it is assumed that the accession takes place in 2004, and that alignment of prices will be carried out in a gradual manner, starting in 2004 (the first year with partly adopted prices) and ending in 2007, i.e. after full implementation of the intervention price cuts in the EU. This assumption suggests a transition period for implementation of market policies.

4 Dynamic Comparative Advantages – Effects of Integration with the EU 90 Price changes by the 2003

Between 1997 and 2003 the private producer prices will be driven by the world market prices (Annex Table 22) and domestic policies and other distortions. It is assumed that the extent of divergences in terms of their tariff/subsidy equivalents will stay at their 1997 level, which means that domestic prices will move with the changes in the world market prices (including the effects of RER).

Price harmonisation with the EU

The adjustment to the EU price levels is to begin in 2004, and end in 2007. The year 2007 is also the year of the accomplishment of the AGENDA 2000 price cuts in the EU dairy sector.⁵³ Hence the full implementation of the price cuts in the dairy regime of CAP and Poland’s alignment to the CAP prices are assumed to coincide. The appropriateness of the assumed timing of price alignment will not be discussed in detail because of its minor relevance for this study.⁵⁴ The focus is on the ultimate outcome of the policy harmonisation under a full-integration scenario, which is assumed to be accomplished by 2007.

The scenario for price harmonisation assumes the elimination of price gaps between the two markets. For this purpose the base period’s (1997) prices in the EU and Poland are first compared.

The EU prices are represented by intervention prices for SMP and butter and the EU market prices for the remaining dairy commodities. However, because of the assumed timing of price alignment the new reformed EU prices represent the relevant target for the harmonisation process. To identify the relevant future price gaps for the full range of commodities used in the simulation two questions needed to be answered. The first is: what the new price levels of the ‘non-intervention’ dairy commodities will be (only the new intervention prices for SMP and butter are known with precision).

The second is: what the positioning of the Polish prices relative to the prices realised by producers from other member states will be.

Benchmark levels for price harmonisation

As a result of the Agenda 2000 reform intervention prices of SMP and butter are to be reduced by 15% to the predetermined levels.⁵⁵ These new prices have been used as the target prices for Polish producers of butter and SMP. This assumption derives from the expectations that (i) at least for

53 O.J. of the EC (1999) or Agra Europe (1999).

54 Alternative options for policy harmonisation have their own merits, threats and constraints (economic and political). For example, given the established timetable for the Agenda 2000 reform in the dairy sector, in the case of an ‘early accession‘, the transition period for full price harmonisation assumed here enables to avoid the confusion of economic incentives which would follow from the increase of prices in Poland already in 2004 (i.e. in the assumed accession year), exactly one year before the Agenda 2000 price cuts are due to phase in. For a discussion of the various options of price alignment strategy faced by the new accession countries see Tangermann and Josling (1994).

55 O.J. of the EC (1999) or Agra Europe (1999).

4 Dynamic Comparative Advantages – Effects of Integration with the EU 91 several years after accession, Polish producers may find it difficult to access market channels guaranteeing prices of these two commodities above intervention levels and (ii) Poland’s net export supply in SMP and butter may even increase, because the possible difficulties with access to market-channels in other dairy commodities may make these two products with administrative prices attractive substitutes.⁵⁶

The issue of benchmark prices for price harmonisation in other dairy products is less straightforward. According to the market effects of the CAP dairy regime the expected price adjustments for ‘non-intervention’ dairy commodities are likely to reflect the changes in the costs of farm milk input implied by the cuts in intervention prices. Like butter and SMP, all non-intervention products in the EU are exportables, which means that under restrictive import access arrangements (import entry prices being much in excess of domestic prices and small minimum access tariff quotas⁵⁷) domestic market prices are determined by the export subsidies and prices on the world market. The export subsidies are, in general, aimed to just compensate for the increased costs of farm milk - the major factor in the procedure for establishing the export subsidy is specific fat and non-fat content (Agra Europe CAP Monitor, 1999). Despite high tariff protection price discrimination against domestic consumers (i.e. in excess of the margin of export subsidy) is prevented by a high degree of competition within the EU market. Consequently, it can be expected that: (i) a reduction in intervention prices for SMP and butter will result in the reductions of export subsidies just to a degree reflecting reductions in the costs of farm milk input, while (ii) the competitive conditions should guarantee the reduction in the domestic prices to a degree just equal to this (marginal) cost reduction.

Other effects involved in price formation include: (i) technological change and consumer preferences that shift the supply and demand curves in markets for specific dairy products (which are not followed by adjustments in export subsidy), (ii) constraints imposed on price policy such as limits on volumes of and expenditures on export subsidy set by the WTO. The latter effect may, in fact, be important at least for cheeses and the group of ‘other dairy products’ for which export subsidies already in 1997 reached the WTO limits.

Future prices for non-intervention dairy products are estimated using the approach described above, i.e. by adjusting base-year (1997) prices for the milk cost reductions resulting from the reduction in the implicit prices of fat and non-fat components due to the cuts in SMP and Butter prices (Annex Table 23). Two kinds of ‘representative’ EU producer prices are used. For such homogenous commodities as selected sorts of ripening cheeses (Gouda), casein and WMP, EU market

56 This expectation is supported by in the experience of Germany’s new states where problems with access to market channels persisted for several years after Germany’s reunification and despite the fact that most firms were subsidiaries of West German dairy companies, Göler et al. (1997).

57 The study by the USDA ERS (1999) reports more than 50% water in the EU tariff rates for SMP and butter in the years 1995-1997. This means that further tariff reductions due to the UR GATT commitments for market access are not restrictive.

4 Dynamic Comparative Advantages – Effects of Integration with the EU 92 notations were taken. Of the market prices reported by ZMP (1999), prices in the Netherlands, a net exporter, have been used.⁵⁸ For the remaining commodities, the unit values in intra-EU trade have been used as an approximation of the EU market wholesale prices.

The estimated EU market prices are relevant as targets for the price alignment provided other influences, including quality differences or imperfect competition, can be neglected. This is assumed to be the case only for the scenario of progressive technical change in Poland, where new technologies bring a necessary quality upgrade, while the associated restructuring and concentration of the industry guarantees an improvement of the bargaining position of Polish producers versus the EU competitors. In contrast, in the scenario of no technical change the target EU prices for Polish producers are to amount to 95% of the EU prices, except for SMP and butter for which no quality effects have been assumed in all the cases considered.