Tropentag, October 5 - 7, 2004 in Berlin "Rural Poverty Reduction through Research for Development and Transformation"

Impact of the EU Accession on Competitiveness of the Estonian Milk Sector

Humboldt-Universität zu Berlin, Department of Agricultural Economics and Social Sciences, Germany

Abstract

Estonia is well known for its extremely liberal economic and agricultural policies. Markets and prices were fully liberalised after regaining the independence in the beginning of nineties. Transition process towards the market economy has been fast. By the second half of the nineties the economy started to grow as the industry was underway with adjusting to the market conditions. However, agricultural production decreased by a half during the transition process and is still decreasing. With the accession to the EU agricultural sector will face another policy change, namely the introduction of the Common Agricultural Policy (CAP). The purpose of the paper is to analyse the impact of these policy changes on the patterns of competitiveness of the milk sector in Estonia.

Policy Analysis Matrix (PAM) serves as a methodological tool for the analysis. PAM is constructed both for milk production and processing industry in order to explore the impact of the CAP measures – that is broadly direct payments to the farmers and market intervention measures at the processed products level (i.e. export refunds, intervention and border protection). Scenarios with the EU policy measures are developed, where the input costs and revenues that are affected by the CAP are altered. The simulations show short term effect of the EU accession on competitiveness of the Estonian milk sector.

According to the preliminary results Estonian milk producers on the whole are not competitive. Export oriented milk processors are competitive, whereas the firms oriented to the domestic market are not. Competitiveness of the milk producers increases considerably shortly after the adoption of the CAP. The impact on competitiveness of the milk-processing sector is less favourable. In order to analyse the impact of the market intervention schemas of the CAP also on the milk production the assumption of the perfect price transmission along the agro-food chain (from processor to producer) is relaxed. The results show that the imperfect price transmission mitigates the expected profitability of the farm sector from the EU common Agricultural Policy.

Keywords: Competitiveness, Estonia, EU accession, milk sector, policy analysis matrix

Contact Address: Piret Hein, Humboldt-Universität zu Berlin, Department of Agricultural Economics and Social Sciences, Luisenstraße 56, 10099 Berlin, Germany, e-mail: piret.heinagrar.hu-berlin.de