The allocation of sugarbeet production contracts: An application of calibrated production equilibrium modelling

A key feature of the 1995 'mini-reform' of the EU sugar regime was a commitment by the Commission to review quota levels on an annual basis with a view to making reductions when there is a danger of breaching the GATT export limits. How such reductions might be implemented and the implications at farm level is clearly a matter of some concern. Economists in particular have pointed out that a simple administrative solution based on proportionate reductions could lead to a loss in economic welfare as both more efficient and less efficient producers reduced production. A carefully administered 'outgoer' scheme might generate a more efficient outcome. Economists would suggest that it is only market-type mechanisms, principally those consistent with the notion of marketable entitlements, which automatically allocate production to the most efficient producers. This would be an important aspect of ensuring that UK sugarbeet production could respond to the inevitable competitive pressures arising from GATT. However, the relevance of these notions for policy decision making will depend on the extent of the efficiency gains which might be achieved using the more complex procedures. This study illustrates one method through which the implications of alternative allocation procedures might be assessed. Data on 1994/95 enterprise-level outputs and inputs for a sample of sugarbeet producers is used to construct a system of production functions and input demand relationships using the calibrated production equilibrium approach pioneered by Howitt (1995, a, b). This detailed model of arable production on these farms (together with a simple representation of 'aggregate' sample-level demand) is used to simulate the impact of ' alternative allocation mechanisms on farm income, output and input levels on these farms. The potential of this approach to simulate the farm level impacts of these policies is clearly shown here. The preliminary results suggest that reallocation of existing production contracts between producers according to a market-type mechanism, can generate small positive benefits for the farmers in the sample investigated here. Should reductions in contracts be deemed necessary a market-type mechanism can accomplish the necessary reallocation at lower cost to the farmers than a uniform reduction of contracted tonnage across all fanners. It is possible that a self-financing 'outgoer' type scheme might generate benefits similar to those associated with a market-type mechanism.