Structural Econometric Model of the European Union Olive Oil Sector
The policy environment within which the EU olive oil sector operates is changing such that production, consumption and trade patterns will increasingly reflect more of a market-oriented than a policy-managed strategy. One reason for this change stems from increasing world agricultural trade liberalization under World Trade Organization (WTO) agreements. Moreover, in recent years an increase in both the global supply and demand of olive oil has occurred, involving a trend toward a gradual growth in world production that is considered by some sources to be above the potential increase in world consumption. The changing circumstances facing the EU olive oil sector makes it important to understand the economic prospects of the sector. To address these questions, a structural econometric model for the EU olive oil sector that could be used to simulate policy changes was developed. The model is composed of a supply block, a demand block, and a price linkage block. The constructed model was then used to generate baseline projections and policy analysis for the EU olive oil sector over the outlook period of 2003-2015. Assumptions and the input values for the exogenous variables were drawn from several reliable sources such as FAPRI (2004), Global Insight (2004), and the European Commission (2004). In the baseline, EU olive oil policies in place in 2003 are assumed to remain in place indefinitely. To quantify the possible consequences of EU policy reform proposals relative to the baseline results, two alternative scenarios are also examined. In one alternative scenario, the intervention price for olive oil is reduced and in the other scenario, 60 percent of the production aid payments are converted into largely-decoupled entitlements under the single farm payment scheme. Under the decoupling scenario, EU olive oil production is projected to decline, which results in an increase in market prices and a reduction in EU domestic consumption. Since the EU price is used as a reference price in international trade (European Commission, 2003), the increase in EU olive oil prices also leads to a fall in EU export demand. Reducing the intervention prices reduces EU production and stocks are projected to decrease. In the short run, the reduction in stock levels is larger than the reduction in production levels, so the short run impact is to drive olive oil market prices down. As a consequence, both domestic and foreign demand for olive oil would increase in the short run. In the long run, the production effect dominates, market prices increase, and export demand falls.
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