eunbil · GT0N1614 · 2006-07-14 00:00:00 — In particular, ending support for the distillation into potable alcohol would make wine alcohol less competitive in the alcoholic beverages market (compared with both alcohol produced from other raw materials and wine alcohol that could potentially be produced in non-EU countries); we can therefore expect some pressure for an overall reduction in the production of wine-based spirits and/or for a substitution in the long term of EU wine alcohol with imports. As a result, less EU table wine to supply this outlet would be withdrawn, thereby creating an additional surplus on the wine market. The distillation of wine by-products is a different matter. Abolishing Community aid for this practice, while maintaining the ban on overpressing grapes, should not have any impact on overall wine production. Appropriate controls could reduce the risk of fraudulent overpressing practices, which would contribute to a greater imbalance in the market in the short term. Wine enrichment The impact of the combined abolition of the aid to must and of the ban on the use of sucrose on the wine market balance is extremely complex and difficult to estimate. Ending the aid for must would certainly stop the recent trend towards artificial expansion of enrichment in countries or regions, mainly in Southern Europe, where this practice was not traditional. The immediate consequence would be that a large part of the volume of must currently used for enrichment (on average about 5 million hl), would come onto the market of table wine. On the other hand, the less intensive use of enrichment practices would result in an increase in the natural alcoholic strength of wines and, as a consequence, a reduction of yields, for both table wines and quality wines psr. At the same time, the ban on the use of sucrose in Central and Northern European countries would entail massive replacement of beet sugar by concentrated grape must. This could contribute to a significant improvement of the market balance. According to a 1991 report , the abolition of the aid for must and the simultaneous ban on chaptalisation would reduce total wine production in the Community by 6.8 million hl. Although one might argue that positive impacts in terms of the reduction of wine production could be potentially weakened by removing the ban on vinification of must imported from non-EU countries, in reality the entry-price system for must should continue to ensure the protection for the domestic market. Permanent abandonment Strengthening the grubbing-up programme under this policy option, provided that the aid is set at an attractive level for producers, has an immediate positive effect on the balance of the wine market, because it directly reduces production potential, and therefore wine production. However, the decrease in production is probably less than proportional to the area abandoned, since it is primarily vineyards with low yields that are expected to be grubbed-up. National envelope and shifts to Rural Development As far as the national envelope and the shifts to RD are concerned, the impact on market balance will mainly depend on the mix of measures chosen by Member States; however, some of the measures suggested in the option could play an important role in reducing the wine surplus by enhancing the restructuring of the sector (e.g. early retirement of wine-growers and investment aid) and some other promote at least a better market orientation of production. Apart from the abovementioned set of tools, other policy measures could indirectly contribute to improving wine market balance: introducing flexibility in wine-making practices and in labelling rules, and setting up promotion projects in non-EU countries, should help expand demand for EU wine by improving its competitiveness (see section 5.1.3). In conclusion, the combined impact of the above policy changes will certainly lead in the long term to a structural improvement in market equilibrium. The introduction of tools aimed at reducing production potential, namely the policy of permanent abandonment, and other measures encouraging the restructuring, would play a major role in the transition towards the market equilibrium. These policy instruments would accompany the process of structural adjustment of the sector, brought about by the abolition of market measures, alleviating to some extent its adverse short-term effects. At the end of the process, when market balance is achieved, the ban on new could be lifted. Option 3: Reform along CAP reform lines Under this option, the only change in policy tools capable of achieving a better market balance, albeit only in the long term, is the abolition of market measures (including the aid for must and related provisions linked to wine enrichment), the impact of which was analysed under option 2. Therefore, in the absence of measures supporting a cut in production potential (or an expansion of demand) and structural adjustment of the sector in the short term, the transition to market equilibrium, prompted by the abolition of the market measures, would be slower. This would produce more intense suffering for the sector, which has relied for many decades on traditional market intervention instruments and would now have complete responsibility for adjusting to the changed market situation. The positive impact generated by greater flexibility in wine-making practices and in labelling rules in terms of improving the competitiveness of wine production would not be sufficient to alleviate the sectors short-term problems. However, as it is the case for option 2, a situation of market balance would eventually be achieved, therefore the ban on new would then no longer be meaningful. Option 4: Deregulation of the wine market Assuming deregulation of the wine market, the two main policies having a direct impact on market balance are the termination of the market measures (including aid for must) and the abolition of the ban on new . As mentioned under options 2 and 3, abolishing market measures is an efficient way to achieve equilibrium between supply and demand in the long term, but would trigger abrupt structural adjustment in the wine sector. Removal of the ban on new would be initially involve a risk in terms of greater market imbalance, since there would be no limit to the expansion for the most efficient producers, thus possibly leading in the mid-term - as soon as the new vineyards would enter into production - to an increase in wine production. Of course, in a long term, the wine market would again reach equilibrium between demand and supply, but, until then, the abolition of the ban on new would amplify the restructuring needs of the wine sector and therefore the difficulties of the market. Prices and agricultural incomes Option 1: Status quo, with possibly some limited adjustments The fragility shown by the wine market in the recent years proves that the sector is too dependent on Community support and that the system is unsustainable. The growing surpluses forecast in the mid-term outlook for the wine sector to 2010/11 (see 2) will generate increasing pressure on intervention measures and on the corresponding budget. It will be increasingly difficult to clear the growing wine stocks rapidly and effectively using market tools. Recurrent crises would entail a progressive decline in prices, and consequently in farm incomes. In this situation, "cosmetic" reform of the CMO would be inadequate. Even in the scenario of an "improved" status quo, the proposed linkage between recourse to crisis distillation and the grubbing-up policy, due to the limited size of the budget envelope, could only result in minor improvement in the market balance and therefore also in prices and agricultural incomes. On the other hand, the slight reduction proposed in the minimum price to producers for potable alcohol distillation would not make the measure more effective, but simply reduce the cost of support for distillation that would take place anyway. Short-term impact on prices Of course, the short-term impacts on prices and incomes would very much depend on the conjuncture. In order to make the different policy options comparable, we assume "average" conditions for each of them. In order to simulate the short-term impact of the status quo scenario on wine prices, and hence agricultural incomes, we link price development to the forecast development of wine stocks. In this respect, the following assumptions are made: on the basis of the mid-term forecasts presented in the 2, the structural surplus generated by the wine market in a "normal" year would be 15 million hl (excluding the volume of wine distilled under the potable alcohol distillation scheme). In a status quo scenario, this surplus could be partly removed by dual-purpose grape (2 million hl) and crisis distillation, but the remaining volume would accumulate in the form of additional wine stocks; although crisis distillation is not always been applied, and its use varies significantly from one year to another, between 2000 and 2005 an average of 4 million hl wine per year was distilled. Distilling greater volumes in future would not be feasible from a budgetary point of view. , the surplus generated by the wine market would lead on average to an annual increase in stocks of 9 million hl (15 - 2 - 4 million hl). Subject to those assumptions, it is possible to give a rough idea of the scale of the impact on table wine prices through simple regression analysis, in which the average annual prices of table wine in the EU are related to the level of wine stocks over the period 2000-2005 (more details on regression analysis can be found in 3). The annual price data for the EU are calculated as the weighted average of the annual table wine price in , and , where those annual prices are calculated respectively as the average of the weekly quoted price. On the basis of the statistical relationship between table wine prices and total wine stocks, and assuming that the level of stocks in "year 0" of the reform is equal to the average for the period 2000-2005, the decrease in average wine prices resulting from an increase of stocks of 9 million hl is estimated to be about . After a further increase of wine stocks of 9 million hl the following year, the price decrease, compared to the initial value at the beginning of the "year 0", would be around -. Prices would be therefore quite low. In the context of a general fall in prices, table wines would be probably most affected, since they are the main beneficiaries of distillation measures, but it seems unlikely that the quality wines sector could be spared from the downward trend in prices. Short-term impacts on agricultural incomes (detailed results can be found in 4) The forecast price drop would also have a direct impact on agricultural incomes. We will mainly focus on table wine producers, who are the main beneficiaries of the market measures and therefore most affected by an unfavourable market situation. To assess the scale of the impact on incomes, a microeconomic analysis has been carried out, based on information from the (). To this end, seven "model farms" were built to represent the most typical table wine producers in five of the largest wine-producing EU regions (Poitou-Charentes, and Languedoc-Roussillon in , and in and Castilla-La Mancha in ). For each of these "model farms", based on 2003 FADN data, all relevant information was analysed, both concerning structural features (total utilised agricultural area, vine area, other crops, family labour and paid labour in the farm) and economic results (output, subsidies, costs, farm net value added and family farm income). The income indicator used for the analysis, which is the most common for agricultural activity, is the Farm Net Value Added per Annual Work Unit (FNVA /AWU). Assuming unchanged farm features, and notably a cost structure (static approach), the economic results of the model farms were projected to "year 0" of the reform. In doing this, it was acknowledged that wine prices in 2003 were particularly favourable; therefore they were replaced by the average price recorded in the period 2000-2005. For that reason, the farms considered in the "year 0" are less profitable than in the base year 2003. Once the economic results of the wine farms for the "year 0" were obtained, the FNVA/AWU for the two following years was simulated; this was calculated by applying, to the wine output in the "year 0", the forecast price drop. The results of this simulation exercise indicate that the price decrease would have a very significant impact on agricultural incomes, which would, after the first year, fall by between for non-specialised table wine producers in Sicily and for table wine specialists in Languedoc-Roussillon. After two years, agricultural incomes in those two regions would decline respectively by and . However, it is important to note that, due to the static approach (unchanged farm feature and cost structure), the method tends to overestimate the fall in income, because it does not consider any economic adjustments by the farms. Graph 1: Evolution of FNVA/AWU of seven typical wine farms in five EU regions before and after the implementation of reform option 1 Source: DG - FADN The explanation for the generally sharper fall in income in Languedoc Roussillon is that, as those farms are highly specialised, they are completely dependent on the wine market situation. Moreover, despite being currently more profitable than their Italian and Spanish counterparts, French producers have higher production costs and a higher ratio of costs to revenue, due to the nature of their business, which is more capital-intensive; if those costs are not covered by a certain level of income the production, they risk becoming a heavy burden. By contrast, farmers in Southern and in Castilla-La Mancha manage, despite the relatively heavy income losses, to maintain a certain profitability, due to their low-input production system. Option 2: Profound reform of the CMO As was previously mentioned, the abolition of market measures would lead in the long term the wine sector to market balance. This long-term equilibrium can be expected to be mainly achieved by production falling into line with demand, rather than through a downwards adjustment of wine market prices. Apart from yearly production fluctuations due to climatic factors, the level of wine stocks would then be stable over time. For those reasons, prices and agricultural incomes would reach satisfactory levels and could be comparable to those in the best years under the existing CMO, when the surplus recorded (excluding wine distilled under the potable alcohol distillation scheme) was close to zero. In this situation of market balance, the conditions for abolishing the ban on new would finally be met. Conjunctural problems linked to occasional surpluses generated by exceptionally abundant harvests, could be tackled through measures supporting safety net mechanisms under the national envelope. Short-term impacts on prices It was mentioned above that abolishing potable alcohol distillation could worsen the wine market balance in the short term. Moreover, and more important, the ending of all market measures would mean that production surpluses could not be physically removed from the market through specific distillation measures, but would invariably accumulate as additional stocks, which would have the effect of depressing prices and consequently agricultural incomes. On the other hand, strengthening the grubbing-up programme to reduce production potential, and providing new incentives for restructuring the sector under the national envelope or rural development policy, would accelerate the adjustment of production and the reduction of production surpluses, thereby diminishing the short-term accumulation of wine stocks. Although it is virtually impossible to quantify exactly the combined effect of the proposed set of measures on short-term trends in wine stocks, some assumptions are made to link such trends to the possible development of wine prices and hence of agricultural incomes. on the basis of the mid-term forecasts presented in 2, the immediate abolition of the distillation measures would mean that the structural surplus generated by the wine market in a "normal" year would increase wine stocks by 15 million hl; due to the disposal of less wine for distillation to potable alcohol, an additional surplus volume would be generated. As the market in wine-based spirits is well established, but on the other hand the loss of competitiveness against alcoholic beverages based on other raw materials and/or potential future substitution by imports of cheaper wine alcohol from non-EU countries could seriously reduce the uses of EU wine for the production of distillates, it could be supposed that this additional surplus could amount to 4 million hl, which would be also accumulated in the form of new stocks; following the abolition of aid for must and the simultaneous ban on chaptalisation, we assume that the replacement of beet sugar by concentrated grape musts would produce a reduction of 6.8 million hl in total wine production (see section 5.1.1); the reinforcement of the policy of permanent abandonment and the restructuring incentives provided under the national envelopes would encourage less competitive producers to leave the wine sector. We could assume that grubbing-up alone would allow the abandonment of 80 000 ha of vineyards per year, which could reduce wine surplus by approximately 3 million hl. The other structural measures under second pillar reduce it by further 1 million hl. Omitting, for simplicitys sake, the smaller possible impacts of other proposed measures, we could estimate that, under this policy option, the surplus generated by the wine market in the first year after reform would lead on average to an increase of stocks of 8.2 million hl (15 + 4 - 6.8 - 4 million). In the second year of the reform, wine stocks would continue to increase, but "only" by 4.2 million hl (8.2 - 4 million). On the basis of the same regression analysis made for option 1, relating table wine prices to total wine stocks, the decrease in the average table wine prices produced by the trend in stocks is estimated at in the first year and after two years. Prices would be at a low level, but still better than in the status quo scenario, and with of short-term recovery, given the favourable trend in stocks. Again, table wines would probably be most affected by the price drop, but quality wines would probably be affected by the general downward trend as well. Short-term impact on agricultural incomes (detailed results can be found in 4) The same method based on model farms as under option 1 was followed for option 2. Following the same static approach, which assumes unchanged farm features, and notably a cost structure, the results of this simulation exercise indicate that the price decrease would have quite a significant impact on agricultural incomes, which would, after the first year, fall by between for non-specialised table wine producers in Sicily and for table wine specialists in Languedoc-Roussillon. After two years, agricultural incomes in those two regions would decline respectively by and . The explanation for the different magnitudes of income reduction in the various types of farm and regions is basically the same as under option 1. Again, because of its static approach (unchanged farm feature and cost structure), the method tends to overestimate the fall in income. Furthermore, another factor determining an overestimation of the income decrease, and specific to this option, is the difficulty to fully include in the model-farm approach the indirect positive impact on income determined by some measures in the national envelopes and in the strengthened rural development policy. Graph 2: Evolution of FNVA/AWU of seven typical wine farms in five EU regions before and after the implementation of reform option 2 Source: DG - FADN One final comment on the impact on income of the proposed ban on the use of sucrose for enrichment: the effect will be to increase production costs in the wine regions currently making use of this oenological practice. According to the study mentioned above , the replacement of sucrose by unsubsidised concentrated must could increase the production costs of that part of German wine production relying on chaptalisation, by . This cost increase could lead to a significant income loss. However, it is not straightforward to quantify that income loss exactly, due to the impossibility of simulating cost variations for specific farm production using the FADN, and because of the small size of the German FADN sample of wine holdings. Option 3: Reform along CAP reform lines The same considerations set out for option 2 would be broadly applicable to option 3: the achievement of the market balance would in the long term guarantee that prices and agricultural incomes reached satisfactory levels. In this case as well, once market balance was attained, the ban on new would be pointless. However, the time frame needed to achieve market balance would be longer, due to the complete absence of specific structural measures accompanying the abolition of market tools. On the other hand, the longer adjustment period would be compensated for by a higher level of income in the end, due to the payment of decoupled aid. Finally, it should be mentioned that no instrument in the CMO would be available to deal with conjunctural overproduction problems, which, due to climatic conditions, occasionally affect the wine sector. Short-term impacts on prices As for option 2, ending distillations measures would mean that production surpluses would invariably accumulate as additional stocks, with serious consequences for market prices. Moreover, in the absence of measures supporting a reduction of production potential (or an expansion of demand) and structural adjustment of the sector, wine stocks in the short term would accumulate more rapidly than under option 2. Again, some assumptions have to be made in order to link the trends in wine stocks to the possible development of wine prices and hence of agricultural incomes. according to the mid-term forecasts referred to above, the immediate abolition of distillation measures would, in a "normal" year, increase wine stocks of 15 million hl; additional wine stocks, in the order of 4 million hl, would accumulate due to less table wine being distilled to produce alcoholic beverages following the abolition of the corresponding distillation scheme; wine stocks would drop by 6.8 million hl following the introduction of the ban on chaptalisation. In conclusion, we could estimate that, under this policy option, the surplus generated by the wine market would lead on average to an annual increase of stocks of 12.2 million hl. On the basis of the same regression analysis made for options 1 and 2, relating table wine prices to total wine stocks, the decrease in average table wine prices resulting from the trend in stocks is estimated at in the first year and after two years, which would lead to the lowest price levels ever. Again, table wines would be probably most seriously affected, but quality wines would probably be affected by the general downward trend in prices as well. Short-term impact on agricultural incomes (detailed results can be found in 4) The same approach based on model farms as under option 1 and 2 was followed for option 3. The only peculiarity of this specific case is that the simulated income must take into account the value of the new decoupled hectare payment received by the wine holding.