Innovation: Farm Accountancy Cost Estimation And Policy Analysis Of European Agriculture

Last update: 30.06.2013
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Keywords: 
eu, business strategy, business aspects, estimation, agriculture, fadn data, economic models, information analysis, information and communication technology applications, management issues, cost of production
The proposed project will provide EU policy makers with information, data, quantitative instruments (economic models) and empirical expertise on cost of production for various types of agricultural products using the FADN data. More specifically, the purpose is to offer first a general cost of production model that could be used to estimate cost of production for key agricultural commodities produced in the European Union. This model will be implemented and validated for a wide range of EU-member countries. Further, additional applications estimating costs of production in EU agriculture, using FADN data and based on different analytical tools, will be developed in this research project.

The expected outputs include:
- a review of experiences of estimating cost of production in the EU and other major agricultural producing countries;
- the development of a general cost of production model for EU agriculture,
- the application of the former model to several agricultural products (crop products, milk and pigs) and to several EU member countries using FADN data,
- an operational computer tool with user-friendly interface that can be used by relevant services of the EU Commission to estimate costs of production

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The FACEPA project analysed production costs in agriculture within the European Union. A large share of this work was to develop tools and methods to estimate production costs from existing statistical data. Specifically, the project aimed at using farm accountancy data network (FADN) data to estimate and analyse production costs. FADN is the European Commissions system to collect farm accountancy and production data for individual farms in European Union member states. The statistical models that would be developed in the project would be validated, tested and subsequently used for policy analysis on national FADN data for each of the nine partner countries.

In spite of the trend towards increased specialisation which has characterised farming in many European countries, most farms still have more than one enterprise. Yet, standard farm-accounting information is typically restricted to aggregate or whole-farm input expenditures, without revealing production costs per unit of each enterprises output. From a business management and agricultural policy perspective, obtaining information on the per-unit production costs for the individual enterprises, measured by so-called input output or, preferably, cost allocation coefficients is particularly important. Farmers may need this kind of information for evaluating the performances of their individual enterprises, for deciding whether to expand or contract particular enterprises or to establish a new enterprise. Moreover, information on enterprise level costs of production may be helpful in preparing activity budgets, planning yearly operations, applying for operational loans and analysing
alternative marketing strategies. Likewise, policy makers may want to have access to such kind of information, as it would considerably improve their capability of properly assessing the consequences of agricultural policy and technology scenarios on the economic performances of different types of farms. Considering that the direct collection of enterprise level information is difficult and requires costly farm surveys, alternative tools based on econometric techniques may offer an attractive alternative for obtaining reliable estimates of unit cost of production in agricultural at a significantly lower cost. The priority of this research project was to implement this approach to estimate cost of production using existing FADN databases at the European Union and national member states.

The FADN data systems are a formidable source of information. However, with the successive reforms since the early nineties of the Common Agricultural Policy (CAP), it can be questioned whether FADN data are still the most appropriate to conduct economic analyses on the European Union agriculture. This was a crucial problem which needed to be addressed and this was what this research project intended to do by:

1. reviving cost of production studies applied to several aspects of the European agriculture and
2. showing how it was possible to conduct fruitful quantitative policy assessment analysis using FADN data. This effort was essentially pursued using alternative farm-based models.

These two broad dimensions of generating cost of production for agricultural commodities in the European Union could not be covered exhaustively by this research project. Nevertheless, it intended to:

1. address the usefulness and appropriateness of the present FADN data systems to measure cost of production for agricultural commodities
2. study the feasibility of developing a general cost of production model for the European Union agriculture that would be easy to use by practitioners and reliable in terms of generating relevant analysis for agricultural production and policy analysis
3. test and implement this cost model in an European context with the idea in mind that it could be applied on a large scale
4. assess the relationship between cost structure and farm performance, farm technology, environmental quality and farm heterogeneity with FADN databases
5. provide methodological improvements to the above general cost of production model
6. undertake the evaluation of agricultural policy measures using FADN data indicators.

Each one of the above objectives was addressed in one or several of the various work packages of the project. The project was targeted to provide technical support and relevant quantitative information on costs of production in agriculture to policy makers and experts within the Commission. In addition, it was also expected that the various tools that were developed in this research project would strengthen the Commissions capacity to estimate costs of production for a wide range of agricultural products and improve the quality and accuracy of impact assessment of CAP measures.

The expected outputs associated with the above objectives included:

1. a review of the European Union FADN system including a special emphasis on its underlying accountancy framework and cost concepts, an examination of its usefulness from a statistical point of view, and an analysis of addressing and incorporating off-farm business activities.
2. a review of experiences of estimating cost of production in the European Union and other major agricultural producing countries
3. the development of a general econometric model used to estimate cost of production for major agricultural products
4. the application of the former model to several agricultural products, namely crop products, milk and pigs, across several member countries using FADN data
5. an operational computer tool with user friendly interface that could be used to estimate costs of production for agricultural commodities
6. extensions and further applications to study the farm efficiency and the competitiveness of crop and dairy sectors in the participant countries
7. the development and implementation of alternative microeconomic models able to represent farm technologies and relative cost structure on the basis of data and information available in national FADN systems and in the European FADN data base
8. applications studying the relationships between the costs of producing commodities across the European Union and its impact upon the landscape and natural environment
9. new methodological applications of the proposed model aimed at capturing the diversity and heterogeneity of the European agriculture
10. the development and implementation of farmed based models to evaluate various agricultural measures on agricultural, environmental, financial and socioeconomic indicators.

The project included several activities aimed at both specification and implementation of new tools and the development of important cost data from a policy point of view. Some of these activities provided interesting contributions to the subject areas covered by this research proposal and their results could be summarised as follows:

1. a proposed general cost of production model that was built in a theoretically consistent way and estimated with recent powerful econometric procedures such as entropy and Bayesian techniques
2. the implementation of this former model in the form of a ready to use computer tool
3. an empirical and policy focus.

Assessing the impact of CAP measures is an obligatory, but complicated task for policy makers. Accurate data on cost of production per farm enterprise or activity is essential to assess the impact of CAP. This kind of data is often taken from different sources for which accuracy might be a problem. Because per enterprise data are not provided directly by FADN there is a need to generate this information through an econometric tool in an accurate and well thought way. The data can for example be also used to analyse the relationship between the cost structure and the farm performance, to quantify the relationship between the costs of producing commodities across the European Union and to analyse the impact of CAP on the landscape and natural environment. All this information that is important for policy makers were at the heart of the results and findings of this project. The implementation of this ready to use computer tool to estimate cost of production would be quite useful to
enhance the use of cost estimates in policy units of the Commission.

The project brought together teams that had high expertise in the areas of cost analysis, farm based modelling and farm accounting data. Most of the partners had also experiences in consultancy and policy advice to government, inter-governmental and international organisations. As this project would develop a common cost of production model that could be applied to many European Union countries, it would provide homogeneous and comparable cost estimates and thus allow for the estimation of cost of production and cost analysis from a broad European perspective.

After a first year mainly devoted to analyse and review the existing and extensive literature and research on the topic, the activities planned during the reporting period were initiated and implemented in all cases. Thus, the preparation, development and implementation of the cost of production model (GECOM) went on during the second reporting period. A prototype of this model was made available to all FACEPA partners for testing and implementing in their own countries. Furthermore, preparations to develop the menu driven computer software of the GECOM model also took place.

The main task of the period was to provide the theoretical and empirical foundation needed to develop and later on use a general cost of production model for the estimation of the cost of production for various types of agricultural products using FADN data. In terms of deliverables the objectives for the reporting period was to launch the public website and to write several working papers that were to deal with the concepts of the European Union FADN accountancy framework, the evaluation and comparability of the European Union and member country FADN databases, the conceptual framework, econometric specifications and estimation procedures of a general cost of production model, the methodology for analysing competitiveness, efficiency and economies of scale, the methodology to assess the farm production costs using farm models, a literature review of other studies in the field of cost of production and the methodology for including environmental outputs in the cost function. The
final versions of these working papers were on public display on the FACEPA home page.

Most activities that were undertaken during this reporting period were in full swing with the development and completion of relevant methodologies so that they were ready to be implemented with the use of FADN databases. The review and feasibility studies that were conducted during this period also showed that national and European Union FADN databases could serve as a basis to estimate the general cost of production model, as well as its various extensions that were proposed by FACEPA. Given these considerations and the relevant background materials developed during the first year of the FACEPA project, the objectives assigned to the work undertaken during the second reporting period were as follows:

1. to determine the usefulness of the European FADN database for the determination of the costs of production from a statistical point of view
2. to develop and implement a general cost of production model for the European Union agriculture that was easy to use by practitioners and reliable in terms of generating relevant analysis for agricultural production and policy analysis
3. to continue the assessment of the relationship between cost structure and farm performance, farm technology, environmental quality and farm heterogeneity with FADN databases, using appropriate methodologies
4. to develop key economic models that used production cost estimates to evaluate agricultural policy measures,

The expected outputs during the second reporting period associated with the above objectives included the following:

1. to produce a ready to use general cost of production model that could be used by FACEPA partners to estimate costs of prediction in their own member country
2. to specify economic models that could be used to evaluate agricultural policy measures
3. to obtain and present empirical results and findings on the relationship between cost structure and farm performance, farm technology, environmental quality and farm heterogeneity with FADN databases.

The main user groups of the projects results would be the European Commission, national authorities responsible for the FADN, researchers in agricultural economics and policy makers and policy advisors in the European Union. Project results were also relevant to farmers organisations, non-governmental organisation (NGOs) working with environmental and rural development issues, international organisations and the international academic community. Further information could be provided at http://www2.ekon.slu.se/facepa/index.html.

Collaboration sought: N/A

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This innovation is the result of the project

Title: Farm Accountancy Cost Estimation And Policy Analysis Of European Agriculture

Acronym: 
FACEPA

Runtime: 
01.04.2008 to 30.09.2011

Status: 
completed project

Organisations and people involved in this eco-innovation.

Please click on an entry to view all contact details.

SVERIGES LANTBRUKSUNIVERSITET

(Sweden)

Role in project: Project Coordination

Contact person: Ms. RAGNARSDOTTER JAJKE Ingrid

Website: http://www.slu.se

Phone: +46-18671437

Contact

BUDAPESTI CORVINUS EGYETEM

(Hungary)

Contact person: Prof. FORGACS Csaba

Website: http://www.uni-corvinus.hu

Phone: +36-14825293

Contact

EESTI MAAULIKOOL

(Estonia)

Contact person: Ms. PAJU Liivia

Website: http://www.emu.ee

Phone: +372-7313068

Contact

INSTITUT NATIONAL DE LA RECHERCHE AGRONOMIQUE (INRA)

(France)

Contact person: Mr. DIABY Moctar

Website: http://www.inra.fr

Phone: +33-130833199

Contact

ISTITUTO NAZIONALE DI ECONOMIA AGRA RIA

(Italy)

Contact person: Prof. MANELLI Alberto

Phone: +39-0647856301

Contact

JOHANN HEINRICH VON THUNEN INSTITUTS BUNDESFORSCHUNGSINSTITUT FUR LANDLICHE RAUME WALD UND FISCHEREI

(Germany)

Contact person: Dr. OFFERMANN Frank

Website: http://www.fal.de

Phone: +49-5315965209

Contact

LUNDS UNIVERSITET

(Sweden)

Contact person: Dr. GULLSTRAND Joakim

Phone: +46-46-2220791

Contact

MINISTRY OF AGRICULTURE AND FOOD

(Bulgaria)

Contact person: Ms. MUSTAFA Sevginar

Phone: +359-298511143

Contact

STICHTING DIENST LANDBOUWKUNDIG ONDERZOEK

(Netherlands)

Contact person: Mr. VERHOOG David

Phone: +31-703358180

Contact

SWEDISH INSTITUTE FOR FOOD AND AGRICULTURAL ECONOMICS

(Sweden)

Contact person: Dr. EKMAN Sone

Website: http://www.sli.lu.se

Phone: +46-462220783

Contact

UNIVERSITE CATHOLIQUE DE LOUVAIN

(Belgium)

Contact person: Prof. HENRY DE FRAHAN Bruno

Phone: +32-10473673

Contact