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GTAP Resource #2318

"Peeling tomato paste subsidies"
by Bunte, Frank

Peeling Tomato Paste Subsidies

The Common Market Organisation (CMO) for fruit and vegetable products is currently evaluated by the European Commission. The evaluation may lead to a reform of the CMO. One of the elements under debate is the production subsidy for processing tomatoes. The processing tomato sector is one of most heavily subsidized sectors in primary production of fruit and vegetables. The current production subsidy equals approximately 50% of producer turnover. This paper evaluates the current CMO for processing tomatoes as well as two possible reforms of the processing tomato supply chain: (1) an abolishment of the production subsidy and (2) a replacement of the production subsidy by area payments (decoupling). The two possible reforms are evaluated by analysing the impact the reforms may have on production and trade patterns of fruits and vegetables in Europe.

The European supply chain
The processing tomato supply chain is a large sector in the Mediterranean countries and to a lesser extent in new member economies such as Poland and Hungary. The European tomato processing industry processed more than 11,000,000 tonnes of raw tomatoes in 2004. Italy is by far the most important producer of processed tomatoes in Europe with a 53% share of European production followed by Spain (22%) and Portugal and Greece (10% each). The production of processing tomatoes still grows fast, notably in Spain and Italy. Processing tomatoes are produced on relatively large farms specialized in extensive production of arable crops and vegetables.

The current CMO
The current CMO for processing tomatoes is made up of three elements:

• Import tariffs on imported processing tomato products. The European tomato processing industry is protected from imports from outside the European Union by import tariffs on processed tomato products. The ad valorem import tariff has been gradually reduced from 18 per cent in 1995 to 11 per cent in 2004.
• Export restitutions for exported processing tomato products. Export subsidies make up the difference between European and world market prices in order to foster European exports.
• Support for domestic (European) production. This is by far the most important element of the CMO. This part involves 300 million euro (2000) and will be elaborated below.

From 2001 onwards, the EU pays a production subsidy of € 34.50 per tonne for processing tomatoes. The subsidies are paid to tomato growers through producer organizations. The subsidy regime is subject to national production thresholds. The national thresholds are not converted into individual thresholds for producer organizations. Instead, the producer organizations have to submit applications for processing aid to the responsible national authorities. When the application is approved, the quantity applied for shall count against the Member State’s threshold. Therefore it goes: ‘First come, first served’. If a country exceeds its threshold, the payments per tonne are reduced proportionately in the following years.
So far, the new arrangement performed as follows:

1. The number of processors decreased more rapidly over the year 2000-2004 than it did over the years 1994-2000 (Pritchard and Burch 2003; EU-MED AgPol). This result is due to the fact that the 1978 mechanism protected individual processors, while the 2001 mechanism does not. The exit of inefficient processors benefits grower prices.
2. Grower prices decreased in Italy and Portugal, but not in Spain and France (AMITOM, 2006). One may expect a decrease in grower prices after the abolishment of the minimum price arrangement. This only happened in Italy and Portugal.

There still is overproduction despite the fact that the new threshold exceeds the old quota by far. As a result, EU expenses exceed target expenses (€ 300 million) by far: € 380 million in 2005 and € 360 million in 2006 (European Commission 2006). Pritchard and Burch (2003) expected overproduction to fall.

The impact of a reduction in the production subsidy
This section presents the impact of abolishing the production subsidy for processing tomatoes. The abolishment of the production subsidy causes an upward shift of the supply function of processing tomatoes. Growers of processing tomatoes will shift their acreage to other crops in their building plan. They will grow processing tomatoes less often and on smaller lots. Assuming constant returns to scale at national levels and a price inelastic demand for processing tomatoes, the abolishment of the production subsidy will be met by an increase in the prices the processors pay for processing tomatoes (Table 1). Grower prices fall slightly. Given the elasticities chosen, the demand for (European) processing tomatoes and thus the output of the tomato processing industry will fall by approximately 15% in Greece, Portugal and Spain and by more than 35% in Italy. Turkey and the Rest of the World will be able to increase imports into the EU and as a result their production.
Table 1 suggests that Italy will face the largest drop in output of processing tomatoes. Italy is a large importer, exporter and re-exporter and will face a surge in imports from the Rest of the World in its home market. Italy is also by far the largest exporter to non-EU countries and faces a major decrease in its exports to these markets. For Greece, Portugal and Spain, domestic demand is the most important driving factor. This shelters their domestic production to some extent.
Table 1 The impact of scenario I on the processing tomato supply chain (percentage changes)
Input prices of processing industry Grower
prices Hectares Output /
Industry demand
Greece 49.5 -0.5 -14.2 -14.2
Italy 48.6 -1.4 -36.5 -36.5
Portugal 49.6 -0.5 -15.7 -15.7
Spain 49.7 -0.3 -14.7 -14.7
Turkey - 0.0 4.0 4.0
ROW - 0.0 10.6 10.6

What is even more important is the fact that agricultural production will lead to a production shift in the direction in which the Mediterranean countries have a comparative advantage: fresh fruit and vegetables. In Greece, Portugal and Spain, the area allocated to fresh fruit and vegetables grows moderately by 0.2-1.0%. In Italy, the area allocated to fresh fruit and vegetables grows by 1.6-1.8% (see Table 2). Due to the fall in demand for processing tomatoes, extensive crop production in general becomes less attractive. As a result, growers will switch not only from processing tomatoes to the production of other extensively produced vegetables and arable crops, but also to fruit and fruit vegetables. This makes a possible fall in the total area employed in fruit and vegetables production unlikely, on the contrary, and gives a spur to the general shift from arable crops to fruit and vegetables in Europe (EC 2004).
As a result of the growth in Mediterranean production of fresh fruit and vegetables, North European countries will face fiercer competition in the production of fresh fruit and vegetables. As a result, there are minor shifts in North European production from fruit to vegetables (which are present in the results but not really visible from Table 2).
Table 2 Area development in Europe under scenario I (percentage changes)
Fruit Vegetables in the open Processing
tomatoes Fruit
Greece 0.6 0.5 -14.2 0.5
Italy 1.6 1.8 -36.5 1.8
Portugal 0.4 0.5 -15.7 0.9
Spain 0.2 0.3 -14.7 0.4
Rest of Europe 0.0 0.0 -22.4 0.1
Turkey -0.2 0.4 4.0 0.0
Rest of the world -0.1 0.1 10.6 0.0

The impact of decoupling
In this section, we discuss the impact of a subsidy reduction plus the introduction of area payments. We assume that area payments prescribe the allocation of some land to processing tomatoes in order to prevent unfair competition with producers of other vegetables, fruits and arable crops. The impact of area payments is modelled by assuming that the land allocation in the countries producing processing tomatoes adjusts partially to th

Resource Details (Export Citation) GTAP Keywords
Category: 2007 Conference Paper
Status: Published
By/In: Presented at the 10th Annual Conference on Global Economic Analysis, Purdue University, USA
Date: 2007
Created: Bunte, F. (4/10/2007)
Updated: Bunte, F. (4/10/2007)
Visits: 4,048
- Agricultural policies
- Europe (Southern)

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