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Economic Questions, Criteria,and Data Needs in ELPEN.

By Peter HinrichsInstitute of Farm Economics and Rural Studies,

Federal Agricultural Research Centre,Braunschweig, Germany

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Any reasoning on livestock production, purely descriptive or normativeand policy-oriented, will pay attention to its economics, at least in allthose cases, in which the produce is traded between agriculture andother sectors and espcially between regions.

Consumers and politicians are interested in a contiuous supply of highquality proteins for human nutrition, The producers need a sufficientmargin to earn their investment and an appropriate labour income,and so do all those ones who process and trade livestock products. Alivestock production that is not economic in a special region, won‘t befeasible there in the long run - unless subsidized with steadilyincreasing budgets.

Economic evaluations - what for?

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So the primary economic question about livestock production is:Will the product sales pay for all the factor inputs such as

- the investments in land, housing, equipment, animals and feed stock,- the variable inputs,- and the labour?

This is the trivial profit question. It is crucial where livestockproduction is the only or at least the most important productionactivity in a farm.

In those farms and/or regions where livestock production is just oneof two or more farming activities, the simple profit question is to bemodified by the question, how well the livestock production goestogether with the other activities, or: how well it fits into thefarm/region as a whole.

Profit-ability

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A similar modification should be made if several farmers in the samecommunity or small region co-operate in order to validate someeconomies of scale and thus improve the utilization of their factorresources.

It is rather easy to calculate profits/losses for past periods, at least onthe basis of bookkeeping data. But what about the future, especiallysince experience taught us that product prices cannot be taken forgranted any longer?

To prevent mis-understanding: We do not reflect the seasonal andcyclical price oscillations around rather a constant average value; weare talking about crucial declines caused by highly competitiveimports from abroad, as a result of the past and even more the futureWTO agreements.

...and Extensions

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With uncertain product prices, all over Europe, the actual questionnow is the competitiveness question:

Which farmers in which regions will be able to produce at thelowest costs and to compete with those low-cost imports?

And – the normative version:What shall livestock producers do to get/keep their costsdown?

By the way:Wherever this problem arises, the farmers and especially their lobbyists first try to assess it as ashort-term problem, somewhat like a prolongued baisse phase of a normal price cycle. Accordingly,they take the costs of investment and labour for fix and so focus on the variable inputs, finding thatthese variable factors are utilized most effectively with high breeds and at a high level of intensity. -And there they are in the intensity trap: High breeds and intensity levels afford improved (high-tech)housing facilities and specialized labourers – and this feeds the fixed costs and keeps the spiralgrowing.Assessing it as a long-term problem will lead us consequently to a different approach: Looking forfavourable locations where production is possible on cheap land in low-cost buildings and at lowlabour costs. In most of the cases this also means large operations.

Costs down -with no exception!

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Of course, competition is not just a matter of costs and prices, butalso of product quality and established market channels. (In thiscontext, we often read the term „consumers‘ preferences“. Weshould be aware that today, in most of the cases, it should betterread: „preferences of the predominant trading companies“. And thistells us to focus on the total production costs per unit rather than onthe quality argument.)

These two main criteria,livestock’s contribution to (regional) farm income,and minimum price required to cover the production costs

may be modified and expanded for providing answers to severalfurther questions.

Competitiveness - more than just low cost

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Upscaling the income effect, e. g., may yield a regional value addedwhich, however, cannot be interpreted as a partial contribution to theNet Social Product, since the interrelations with trade partnersproviding the inputs and marketing the produce cannot be sufficientlyintegrated in the evaluations on a regional level.

Or: Enhancing the income calculation by a dynamic projection for tenyears ahead, as it can be performed in co-operation with theInternational Farm Comparison Network (IFCN), can evaluatealternative szenarios of the future.

The most interesting and powerful field of application will be theevaluation of political measures, especially their (regional) impactson livestock production. With-versus-without comparisons of theseimpacts will constitute the majority of ELPEN’s evaluations.

What else to figure out? (1)

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In several cases, it will be desirable to figure out not just the direct(or primary) effects, but also the producers‘ responses which willresult in changed quantities of production and/or factor utilization.Analysis of this kind requires basic knowledge about the producers’market behaviour (price elasticities of production) or simulationmodels which try to estimate this behaviour from the changes of thefarm or region specific input/output relations and the resulting dualvalues.

ELPEN will not construct models like that, but will try to implementthe results of such models (CAPRI, FARMIS, e. g.) from similarapplications.

What else to figure out? (2)

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The political measures to be evaluated can affect livestockproduction in very different ways.(1) Market regulations usually affect the product prices – directly or

indirectly – and by this can change the producers‘ incomes aswell as their production decisions.

(2) Subsidies for enhancing the profitability of special goods havethe same effect –directly.

(3) Other subsidies, especially factor-bound payments, justimprove the famers‘ income and their liquiditiy. If, however, theliquidity has been a bottleneck in production, the subsidies willresult in more production.

(4) Environmental and animal-welfare regulations afford specialfeatures of the evaluation system, as they usually do not affectthe product prices and not the quantities, but certain bio-technical production parameters, which are usually notquantified in the standard bookkeeping schemes.

Policy impacts

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Data from different sources

Therefore, but also for several other reasons, our evaluation toolsshould explicitly contain the major bio-technical Input/output-relations, such as stocking rates, daily gains, feed conversionrates, protein/phosporus input and output per kg liveweight, etc.

These data cannot be provided by the standard bookkeepingdata (FADN). We shall have to collect them from other sourceslike the regional extension services or from experimental stations.This includes the latest bio-technical developments

On the other hand, in order to be up-to-date with the recentmarket developments, we shall look up the actual market andprice reports and – more important – the latest trends.

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ELPEN‘s principal data source for economic assessment will be the bookkeeping results collected in the Farm Accountancy Data Network (FADN). The positive features of this source are:

• This network is established in all EU member countries.

• A harmonized methodology of data collecting and processing provides comparable results.

• The differentiation by regions, farm types and sizes seems to be sufficient for many questions.

• The results are representative and allow upscaling.

• The end users of ELPEN‘s evaluations are already quite familiar with the FADN system and its results.

FADN (1)

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But there are some important shortcomings with FADN, too:

• The access to FADN data is still restricted and not easy.

• The data sets are collected for merely socio-economic assessment and from this reason contain only very few biological/technical data.

• The facilities of accessing important features of the production systems (intensities, e. g.) are rather poor.

• Many of the regions are too large for figuring out typical production systems of special regional interest.

• FADN data are more than one year old when issued.

From this it follows that we need further data that can fill these gaps.

FADN (2)

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A good complement to FADN data can be seen in those data bases which are maintained and updated at regular intervals by several national or regional extension services, farmers‘ or breeders‘ organizations. They provide many of those informations we are missing in the FADN data sets, and from that these data bases are valuable for ELPEN‘s work, not only for our economic evaluations, but also with regard to the biological/technical and the environmental aspects. Yet there are some crucial disadvantages and deficiencies that restrict the use of these data bases:• They are not at all harmonized Europe-wide, and meaningful interpretation often requires expert knowledge.• Collecting these data needs much labour input. We cannot expect to get them for free.• The farms contributing to these data bases do, as a rule, not represent the regional average.

Regional production records

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Regional livestock statistics

Detailed livestock counts or censusses are performed, and their results are published in almost all EU member countries, but not at regular intervals in many regions.

For those regions, however, that publish these data, we may get valuable information about the distribution of special production systems, e. g., or the location of problematical stocking densities.

Usually, the regional calibration of these data bases is much more detailed than that one of FADN. In some special evaluations this might be used for splitting up the bookkeeping results in more regional detail. In most of the cases, however, the value of these data will result from the additional regionalized information they provide.

Since these databases are not updated and published the same way in all European regions, their utilization will be locally restricted.

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Market statistics and reports

The biological and technical data we obtain from regional production records and the data from the regional livestock statistics do not change quickly, as a rule. So they need not be updated every year. This does not hold for most of the product prices nor for the prices of the main variable inputs, especially feed.

We have to pay much attention to the price fluctuations on the product and factor markets, for two major reasons:

(1) Extremely high or low prices in one period may distort long term economic assessments thats mainly based on this period‘s data. Long range time series will prevent mistakes like that.

(2) On the other hand, short-term projections are quite popular in the

field of policy assessment. They should incorporate the latest informations on prices and trends.

For these purposes, market statistics, reports and forecasts are useful tools for ELPEN.