European Integration: The case of agricultural farms in Slovak Republic

This paper assesses the consequences on farms' financial situation an their production structure as well as regional differences due to possible Slovak EU enlargement. The farms analysed are large co-operative and each of them is taken as representative for each growing region in Slovak Republic. Linear programming modelling technique was considered in the paper and all theoretical derivation are based on microeconomic model of McCarl and Spreen (1980) [8]. In the derivation of the model, it is assumed that the sector is composed of many competitive microunits, none of which can individually influence output or factor prices. This means that farmers are price takers and maximise their gross margin (revenue minus variable costs) given market prices and subsidies provided under agricultural policy, which is considered. The farm's model presented in this paper considers four agricultural policy scenarios (or four different vectors of policy instruments): (1) CEEC - scenario: considers the continuation of existing agricultural policy in Slovakia; (2) AGENDA - scenario: assumes entrance of Slovak Republic to EU and therefore considers reformed European Common Agricultural Policy (CAP) (European Commission's policy reform ideas presented in the Santer Package of 16th July 1997); (3) AGENDA no EU payments - scenario: differs with previous one in fact that here farmers are ineligible for direct payments under the CAP; (4) LIBERAL - scenario: considers the complete liberalisation of Slovak agricultural policy. All four policy scenarios were formulated for two distinct years, 2002 and 2007 and the base year 1996 for comparison purpose. As derived in the model the farmers are price takers and therefore prices are exogenously defined in the model. Specifically we have considered two alternative assumptions. First assumes that world market prices remained unchanged (optimistic price scenario) at their 1996 levels and second assumption considers that they declined by 2 % in real term per annum (pessimistic price scenario). Based on the optimization results, following conclusions could be made: 1. In the basic period of 1996, all the selected farms were profitable but with different level of operators income. This difference in the level of operators income does not correlate with growing regions characteristics i. e. their climatic and land conditions characteristics or to their appropriateness to agricultural production. The reason should be found in different subsidy levels, that were increased in favour to regions with worse production conditions. A larger sum of subsidies were disbursed to farms situated in the above mentioned regions. Area payments as portion on total sum of disbursed subsidies increases in relation to regions with worse production conditions. 2. Under optimistic price forecasts, Agenda 2000 Scenario led in both modelling periods, to increasing level of farms' profitability. Of course this level declined with regard to farms with worse production conditions. While keeping fixed costs unchanged, farms' profitability was affected by increased level of Gross Margin. Such an increase in Gross Margin was caused by higher EU price and subsidy level, that declined in relation to farms situated in regions with worse production conditions. 3. Under pessimistic price forecasts, Agenda 2000 led to losses only in 2007, in the farm situated in potato growing region. This farm is characterized by high level of overheads. In all other models farms could earn profit in both periods. 4. Under optimistic price forecasts, Liberal Scenario led to a profitable structure only in the farms situated in regions with better climatic and conditions, specifically corn and sugar beet growing regions. Other farms, under trade liberalization would suffer losses. 5. Under pessimistic price forecasts in the Liberal Scenario no farm was profitable. There are two reasons that account for that: farms' low competitiveness and the high level of overheads. Only the farms situated in corn and rape growing region are competitive. 6. The CEEC Scenario, that accounts for the current level of subsidies applied by current Slovak agriculture policy, and that domestic agriculture commodity prices gradually reaches the world price level, led to a sharp increase in the operators income level of all farms comparing to 1996. At the other hand the level of operators income per hectare of agriculture land showed its dependence to the character of growing regions. The reason could be found again at the higher level of subsidies disbursed to regions with worse production conditions. 7. Slovakia presents an interesting case for the implications of EU accession, which is largely determined by current Slovakian agricultural policy, with large subsidies, amounting 4- 22 % of total output depending on farming conditions. In the absence of the direct payments from the CAP Slovak farms in the potato-oats, potato and mountainous regions fair particularly badly whereas farms in the corn and sugar beet regions fair better with the farm income on the farm in the corn region rising by 88 %. Thus, Slovak farms in the more productive regions would gain, and those in the less productive regions would lose from the adoption of Agenda 2000 with the direct payments of the CAP. 8. The results indicate that production structure in Slovak farms has not change significantly with change of policy scenario, especially in crop structure. But animal production was much more sensitive on price change and scenario change. 9. Current Slovak agriculture policy gives a strong support to farms situated in regions with worse production conditions and thanks to this fact, these farms' earned profit per hectare of agriculture land is relatively high. Consequently, the farms situated in regions with conditions appropriate for intensive farming production, face tougher competitive conditions in the market. The updated agriculture policy instruments implemented in Agenda 2000 Scenario leads to changes in the support priorities for the farms, and in the achieved profitability relations. Higher support is given to farms in regions with better conditions. However, it should be taken in consideration that the model does not include the supports given to farmers in EU under the different regional development programs, which may improve the financial position of the farms situated in regions with worse production conditions. For instance Council Regulation 1259/99, under certain circumstances, makes possible to give support for less-favoured areas similar to what is given under current Slovak agriculture policy