Ex-ante evaluations of public policies using farm models based on econometrically estimated flexible cost functions

Agriculture in the EU is strongly influenced by public policies. Most of the existing economic models which provide ex-ante analyses are defined on a more or less aggregated level, which ignores the underlying heterogeneity among farms in Europe. This paper presents a model which fills this gap, using the unique EU farm accountancy data network, which includes detailed economic and physical information for up to 90000 farms per year.Flexible cost functions for dairy, cattle and crop were econometrically estimated using the EU farm accountancy data network for the period 1995-2007. For ex-ante evaluation of public polices, these cost functions are integrated in the objective function of farm mathematical programming models. The programming models are systematically calibrated using the neo-classical optimal condition that output prices should be equal to marginal costs. Indicators of changes in input demands, output supplies, farmland rental values, quota rents and farm profits are derived from the simulations according to farm type, farm size and European region. Simulation scenarios include dairy and sugar quota removals, and price increases for energy (including fertilizer costs) and selected crops (oilseeds and cereals). The model results point to a modest increase of milk supply in Germany (Lower Saxony, Bavaria) when quota is abolished and milk prices remain constant. The comparatively small impacts of a milk quota abolishment on milk output at the sectoral and regional level hide the large changes occurring at farm level. While many farms increase their production, others reduce it considerably as a consequence of the increased competition on the land market. If the milk quota is abolished and prices remain constant, farm income increases by 9% in Lower Saxony and 1% in Bavaria, reflecting the different levels of quota rents in the reference year. In both regions, income decreases by 11-13% if milk prices fall by 10%, while for higher prices decreases, income falls more drastically in Lower Saxony, reflecting the stronger specialization of dairy farms, whereas in Bavaria income losses are partly cushioned by the higher importance of beef output in total output. The results highlight that that the impact of a sugar quota abolishment is strongly reduced by earlier sugar market reforms. With a further sugar beet price decrease of 10%, sugar beets would lose their profitability in all sample farms in Lower Saxony, and would be replaced by oilseeds and cereals, which is line with expectations. Generally, the results highlight that changes in farm supplies, input demands and gross margins are heterogeneous across farms, thus showing the need to perform simulations at the farm level.