Agricultural and Food Policies in Global Trade The Case of Almonds and Hazelnuts

Abstract

This dissertation consists of three essays. The first essay presents an industry model developed to analyze the link between targeted production subsidies and excess inventory holdings. The Turkish hazelnut industry is a highly relevant case to analyze this relationship due to the fact that hazelnut acreages expanded in unapproved areas led to overproduction and caused government inventory accumulation. The state ended long-lasting guaranteed purchase policies and introduced targeted production subsidy and diversion payment policies in 2009. According to new policies, hazelnut producers in approved production areas (i.e., “licensed” producers) started to receive a subsidy of 1,000 USD per hectare. At the same time, the government offered diversion payments to producers in unapproved farmlands (i.e., “unlicensed” producers).The goals of the new policies were to support producers that were reliant on hazelnuts as their primary source of income, to reduce the acreages of hazelnut grown by unlicensed producers, and to lessen the volume of excess hazelnuts held in government reserves. In Essay 1, I present an economic analysis of the impact of this major policy change and specify an equilibrium displacement model (EDM) that incorporates inventory holdings to examine the relationship between the production subsidy and carry-over stocks. The essay includes an analysis of the economic impacts of the policy on domestic producer groups, government inventories and world trade flows. A major question to be investigated is whether a targeted production subsidy can be effective at reducing excess inventory while providing welfare gains to the domestic producers. The study attempts to quantify the magnitude of the ii difference between the changes in domestic production and total consumption (domestic plus export) stimulated by an increase in subsidy. Findings suggest a 10 percent increase in the targeted production subsidy raises licensed producer price by 8.4 percent and depresses unlicensed producer price by 1.6 percent. Accordingly, licensed acreages increase by 1.6 percent and unlicensed acreages will decrease by 0.4 percent following a 10 percent increase in the subsidy. However, total production will increase by 0.8 percent due to licensed acreages having a larger share of domestic supply (61 percent) than unlicensed acreages (39 percent). Domestic (export) consumption increases by 0.5 percent (1 percent), on average, with a 10 percent increase in subsidy, while government inventories declined as much as 0.5 percent because the increase in total consumption (domestic plus export) exceeds the increase in domestic production. Welfare gains are mainly split between licensed producers ($74 million) and domestic and foreign consumers ($14 million and $66 million, respectively). Despite net domestic welfare loss up to $63 million, the Turkish treasury gains $14 million due to reduced inventory holdings. These results suggest the major beneficiaries from an increase in subsidy are the licensed producers and foreign consumers. Overall, the policy is expected to achieve its objectives as it improves the welfare of licensed producers and reduces government inventories. However, the impact of the subsidies is limited in terms of inventory reduction, as the elasticity of inventory with respect to subsidy is highly inelastic at 0.05. Furthermore, an increase in the targeted production subsidy results in a decrease in unlicensed acreages. This was the primary objective of the diversion payment policy, which failed, given the fact that the applications for diversion payments were limited to 1 percent of total unlicensed acreages. The cost of an increase in the production subsidy to taxpayers iii would have been 22 percent higher had treasury gains from reduced inventories not been taken into account in the welfare analysis. Findings suggest that a targeted production subsidy that shifts production from prime agricultural land to hill country may be a more cost-effective policy for supporting hazelnut producers than an inventory policy that diverts production from the market when prices are low. Essay 2 examines the factors affecting world exports to the European Union and the interaction between food safety regulations and export responses of nut producers. The impact of domestic production factors, as well as natural and manmade trade barriers for bilateral imports to the EU were investigated in a dynamic setting. A major hypothesis to be investigated is whether food safety standards act as barriers or catalysts in the EU almond and hazelnut markets. The hypothesis is extended to examine the effects of foodstuff regulations on exports from developing versus developed countries. The essay also analyzes the impact of harmonization of EU food safety standards on EU imports from EU exporting countries (i.e., intra-EU trade). The impact of domestic production factors and natural and manmade trade barriers on bilateral imports are estimated for a range of percentile values of the supply size distribution (10th, 50th, and 90th) to identify structural differences in dominant and small scale supplier exports. The empirical findings suggest that stringent aflatoxin standards significantly reduced trade and impeded the establishment of new trade partnerships. The results further suggest that harmonization of food standards promotes market integration and intra-EU trade. In contrast to claims (Anders and Caswell, 2009; Disdier, Fotagne, and Mimouni, 2008), the present analysis suggests restrictive aflatoxin measures have a negative impact on developing countries, at least with respect to almond and hazelnut exports. Furthermore, the relative impact of stringent standards is greater (more negative) for exports from newly emerging economies. The estimated iv marginal effects of trade determinants did not differ by size of the supplier. The estimated coefficients of most variables vary less than 10 percent between large and small suppliers, except for geographical distance between trading partners, which reduces the trade flow by 18 percent for large producers (those in the 90th percentile of the size distribution) in comparison to small suppliers (those in the 10th percentile). This study provides a comprehensive analysis of the role of food safety standards, domestic production factors, and natural and manmade trade barriers on world hazelnut and almond exports to EU markets. The results of this study should be considered in the establishment of new policies for other tree-nut industries (e.g., walnuts, cashews, and pecans) as, to date, the EU’s food standards remain unchanged at more restrictive levels than international standards. Particularly, findings suggest that tree-nuts exports from developing and developed countries would significantly increase if the EU aligns its food standards at the international level for other tree-nut products. The final essay focuses on the sensitivity of world demand for almonds and hazelnuts to changes in relative prices and income. To address this issue, a generalized differential demand model developed by Eales, Durham, and Wessells (1997) is estimated using quarterly data for almonds from the US, Spain, Australia and the rest of the world and for hazelnuts from Turkey, Georgia, the US and EU for the period 2005 to 2014. An important issue to be resolved is whether almonds and hazelnuts can be treated as separable products. This issue is important because if the products are separable, the estimation problem is simplified in that the demand system for almonds (differentiated by source origin) can be estimated independently of the demand system for hazelnuts (also differentiated by source origin). Therefore, the analysis includes a formal test for weak separability in world almond and hazelnut demand. Findings suggest that almonds and hazelnuts are separable goods in demand. Conditional v on this finding, price and expenditure elasticities are estimated for these two products separately. The generalized model is utilized to estimate the world hazelnut demand system, which consists of four equations (i.e., Turkey, the EU, Georgia, and the US). The results of the hazelnut demand estimation indicate that world demand for hazelnuts from Turkey and the US is less price-sensitive in comparison to hazelnuts from the EU. The estimated Marshallian own-price elasticities are -0.69, -0.88, and -1.93 for hazelnuts exported from Turkey, the US and the EU, respectively. Furthermore, the calculated expenditure elasticities for hazelnuts suggest that an increase in world expenditure on hazelnuts has an insignificant impact on the exports from the EU, but benefits other exporting countries with the least gain for US hazelnuts (0.57). Surprisingly, Georgian hazelnuts exhibit a 1.24 percent gain from a 1 percent increase in world expenditure on hazelnuts, which exceeds that of hazelnuts from Turkey at 1.17 percent. World demand for almonds is investigated using a generalized differential demand system approach for almonds from the US, Spain, Australia, and ROW. The Rotterdam model is found to be compatible with the almond data. Conditional own-price elasticity estimates suggest that world demand for almonds from the US, the leading almond exporter, is more price sensitive relative to almonds of other origins, as its Marshallian own-price elasticity is elastic at -1.07, contrary to the inelastic demand for almonds from Spain (-0.64) and the rest of the world (-0.55). The conditional expenditure elasticities are found to be highly inelastic for almonds from Spain (0.003) and the rest of the world (0.12), but elastic for almonds from the US (1.36). This finding suggests an increase in world almond expenditure significantly stimulates almond demand from the US at a much greater extent than almonds from elsewhere. World demand for hazelnuts and almonds from all sources is estimated to be inelastic with almonds having relatively higher price elasticity (-0.76 and -0.95, respectively). The more vi elastic demand for almonds suggests that removal or reduction of trade barriers to international markets would stimulate world demand for almonds to a greater extent than demand for hazelnuts. In addition, more elastic demand implies that global markets are more likely to absorb supply increases with less reduction in producer prices. Accordingly, supply shocks may result in high price volatility for goods having less elastic demand. Findings of this study are anticipated to inform policy makers, growers, and marketers in their effort to develop effective strategies for expanding sales and market shares for almonds and hazelnuts.