Annex 4 analytical methods

The economic model builds on a philosophy of model templates which are structurally identical so that instances for products and regions are generated by populating the template with specific parameter sets. This approach ensures comparability of results across products, activities and regions, allows for low cost system maintenance and enables its integration within large modelling networks. At the same time, the approach opens up the chance for complementary approaches at different levels, which may shed light on different aspects not covered by CAPRI or help to learn about possible aggregation errors in the model.

The CAPRI economic model, comparative-static in nature, is split into two major modules: the supply module and the market module.

The supply module consists of independent aggregate non-linear programming models representing activities of all farmers at regional or farm type level captured by the Economic Accounts for Agriculture (EAA). The programming models are a kind of hybrid approach, as they combine a Leontief-technology for variable costs covering a low and high yield variant for the different production activities with a non-linear cost function which captures the effects of labour and capital on farmers’ decisions. The non-linear cost function allows for perfect calibration of the models and a smooth simulation response rooted in observed behaviour. The models capture in high detail the premiums paid under CAP, include NPK balances and a module with feeding activities covering nutrient requirements of animals. Main constraints outside the feed block are arable and grassland – which are treated as imperfect substitutes -, set-aside obligations and milk quotas. The complex sugar quota regime is captured by a component maximising expected utility from stochastic revenues. Prices are exogenous in the supply module and provided by the market module. Grass, silage and manure are assumed to be non-tradable and receive internal prices based on their substitution value and opportunity costs. A land supply curve let total area use shrink and expand depending on returns to land.

The market module consists in turn of two sub-modules. The sub-module for marketable agricultural outputs is a spatial, non-stochastic global multi-commodity model for about 50 primary and processed agricultural products, covering about 70 countries or country blocks in 40 trading blocks. Bi-lateral trade flows and attached prices are modelled based on the Armington assumptions (Armington, 1969). The behavioural functions for supply, feed, processing and human consumption apply flexible functional forms where calibration algorithms ensure full compliance with micro-economic theory including curvature. The parameters are synthetic, i.e. to a large extent taken from the literature and other modelling systems. Policy instruments cover (bi-lateral) tariffs, the Tariff Rate Quota (TRQ) mechanism and, for the EU, intervention stocks and subsidized exports. This sub-module delivers prices used in the supply module and allows for market analysis at global, EU and national scale, including a welfare analysis. A second sub-module deals with prices for young animals.

As the supply models are solved independently at fixed prices, the link between the supply and market modules is based on an iterative procedure. After each iteration, during which the supply module works with fixed prices, the constant terms of the behavioural functions for supply and feed demand are calibrated to the results of the regional aggregate programming models aggregated to Member State level. Solving the market modules then delivers new prices. A weighted average of the prices from past iterations then defines the prices used in the next iteration of the supply module. Equally, in between iterations, CAP premiums are re-calculated to ensure compliance with national ceilings.

Post-model analysis includes the calculation of different income indicators as variable costs, revenues, gross margins, etc., both for individual production activities as for regions, according to the methodology of the Economic Accounts for Agriculture (EAA). A welfare analysis at Member State level, or globally, at country or country block level, covers agricultural profits, tariff revenues, outlays for domestic supports and the money metric measure to capture welfare effects on consumers. Outlays under the first pillar of the CAP are modelled in very high detail. Environmental indicators cover NPK balances including nitrogen leaching, and carbon balances including carbon sequestration, and output of climate and air pollution relevant gases according the guidelines of the Intergovernmental Panel on Climate Change (IPCC) and the EEA/EMEP  (European Monitoring and Evaluation Programme of the European Environment Agency) air pollutant emission inventory guidebook. Model results are presented as interactive maps and as thematic interactive drill-down tables. The CAPRI graphical user interface including the exploitation tools are documented in a separate user manual.

Furthermore, regional data are disaggregated to clusters of 1x1 km grid cells, covering crop shares, crop yields, animal stocking densities, and nitrogen balance term; these data are used to calculate other environmental indicators such as soil erosion.

The key inputs used for the model:

• prices
• agricultural land allocation
• supply and use balances of agro-food commodities
• productivity indicators (yields, processing ratios, slaughter weights, fat and protein content of milk)
• macroeconomic indicators (GDP, exchange rate, number of population)
• policy indicators (CAP and trade policy)

CAPRI constructs is own database (COCO – complete and consistent) at the global, national and regional level. The databases exploit wherever possible well-documented, official and harmonised data sources, especially data from EUROSTAT, EAA, FAOSTAT, OECD and extractions from the Farm Accounting Data Network (FADN). This allows for the possibility of annual updates. In case of gaps in the database, suitable algorithms were developed and applied to fill them. The database is constructed in a manner that assures consistency between the different data (i.e. closed market balances, perfect aggregations from lower to higher spatial levels, match of physical and monetary data).

Specific inputs from other sources or models are used as well (EDGAR, IMPACT, GLOBIOM, EBB, ... ) to complete specific parts of the CAPRI database.

• agricultural production
• crop yields
• production areas
• agricultural commodity trade
• farmer’s income
• prices and subsidies for commodities and regions
• Greenhouse gas and air pollutant emissions including carbon sequestration from land use change and land management change
• Nutrient and carbon balances including nitrogen leaching
• Water use by agricultural crop

The results generated from CAPRI are stored in a GDX format. A Java based graphical user interface allows the steering of different working steps (data base updates, baseline generation, model calibration, scenario runs).

The CAPRI model is well suited to evaluate the impact of the Common Agricultural Policy, trade and environmental policies on agricultural production, income, markets, trade and the environment, on global and regional (NUTS2) scale.

The CAPRI model is often used to evaluate changes to the CAP and the potential impact of free trade agreements on the agricultural sector. It is also used to evaluate impacts on the agricultural sector of other sectoral policies such as environment and climate change.

• Agriculture and rural development 
• Climate action 
• Environment 
• Regional policy