This Wednesday Stefan Wimmer will present his research results concerning market deregulation in the European sugar market.

Date and place: 27/6/2018, 11-12 am, seminar room PuR

Presenter: Stefan Wimmer

Title: Market Deregulation and Sector Profitability: Empirical Evidence from Sugar Beet Farming in Germany

Abstract: The abolishment of the EU sugar quota in 2017 is expected to have major effects on the sugar sector. As the industry will be allowed to produce unlimited amounts of sugar and increase exports, the demand for sugar beets will increase at least in the short-term. On the other hand, domestic sugar prices are increasingly linked to the world market prices, which have been far below the EU sugar price in past years. In the long term, a particular threat for the EU sugar beet industry comes from the possibility to import an unlimited amount of cane sugar and the use of high-fructose corn syrup as sugar substitute. The complexity of short term and long-term consequences of the abolishment of the sugar quota raises the question how EU sugar beet growers respond to the new market situation. The goal of this work is to analyze changes in profitability of sugar beet farming after the announcement of the quota abolishment in 2006. Understanding the dynamics of farm productivity and profitability is important to assess whether the EU sugar sector will remain profitable after 2017. To this end, we decompose changes in farm profitability into changes in total factor productivity (TFP) and terms of trade using the non-parametric Lowe index method. As noted by O’Donnell (2008), the Lowe index satisfies all economically relevant index axioms including identity and transitivity. Thus, it allows consistent comparisons across time and space in contrast to the commonly used Laspeyres, Paasche, Fisher and Törnqvist indices, for example. We then apply the Olley-Pakes (1996) decomposition to investigate the extent to which resource reallocation has contributed to changes in sector-level productivity and profitability. Data is taken from the EU Farm Accounting Data Network (FADN). The sample is a rotating panel of farms in Germany covering the years 2004 to 2013. After restricting the sample to farms that produce sugar beets at least once during the period of the study, it consists of 9803 observations and 2050 farms. Preliminary results show that the level of productivity remained relatively stable over the period of the study (2004 – 2013) and that changes in profitability were mainly driven by terms of trade. Even though there are large productivity gaps across farms, sector-level productivity is only slightly above average productivity, indicating a suboptimal resource allocation even after the 2006 reform. We further tested whether resource allocation is linked to the capital structure of surrounding sugar factories. In Southern Germany, for example, the dominating sugar company is a joint-stock company with the major shareholder being a farmers’ cooperative. Therefore, it is expected that resource allocation is less efficient compared to regions where the sugar factories are run by a private company, as it is the case in Western Germany. However, we could not reject the null-hypothesis that there are no differences between different catchment areas. It is likely that resource allocation becomes more efficient after 2017, which would be accompanied with a significant increase in profitability at current prices. From a policy perspective, we recommend to support farms that cannot keep up with high-productive beet farms in the transition to alternative production systems.