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A Market Analysis of a Set-aside Program by the Five Major Grain and Oilseed Exporting Countries

The objective of this market analysis is to estimate the impact of a set-aside program where five of the major grain and oilseed producing countries/regions of the world agree to reduce their area dedicated to grains and oilseeds by 10 percent of a historical base. The five countries are Argentina, Australia, Canada, the European Union and the United States. The main focus of the analysis is two scenarios where we simulate a shift in supply by reducing the area available for production in these countries/regions:

However, we examine four scenarios to give an indication of the sensitivity of the results when some participants are removed from the program.

Because of the relatively low demand elasticity for food, the price impact on grains and oilseeds resulting from the introduction of a 10 percent set-aside program by these five major exporting countries/regions is significant in the short term. In the second and third years of the set-aside program (2000 and 2001), the prices for wheat, corn and soybean range from 26 percent to 32 percent above baseline levels but are still below the high levels observed in the mid-1990s. Following the removal of the set-aside program, all the major grain and oilseed commodity prices return to baseline levels relatively quickly. The results suggest that a permanent set-aside program would be necessary to keep prices from returning to relatively low baseline levels.

To get some indication of the impact of a permanent 10 percent set-aside program on international markets, we undertook the second scenario. With the set-aside program in place until 2006, the average impact is obviously stronger but the results show a declining effect over time.

Two factors limit the size of the price increase under a permanent set-aside program - slippage and free riding. Introducing a 10 percent shift in supply (through reduced area) will not necessarily translate into a 10 percent reduction in the quantity of grains and oilseeds produced by these five countries - slippage. Increasing production above baseline levels by non-participating countries also undercuts the program - free riding. On average, over the last five years of the permanent set-aside program scenario (2002-2006), because of slippage and free riding only 32 percent of the original shift in supply is reflected in the world harvested area of those commodities. When higher yields are taken into account, only 27 percent of the potential production reduction materializes on average in the last five years of the scenario.

Free riding has been the major cause of failure of past supply reduction initiatives (and/or public stock holdings) experience - from maple syrup in Quebec and cocoa in Ivory Coast to cereals in the United States and wool in Australia. The results of this analysis are consistent with these past experiences.

The impact on world prices is considerably less if the European Union and the United States were unwilling to participate because they already have substantial land diversion programs. The impact is further lessened if Canada were the only country to undertake the 10 percent set-aside program.

The large increases in feed prices resulting from a set-aside program would have a negative global impact on the profitability of livestock producers. The benefit of a set-aside program to agriculture as a whole would be seriously mitigated by this increase in cost to livestock producers.

For more information on this publication, please e-mail: Econ_Research@agr.gc.ca.

A Market Analysis of a Set-aside Program by the Five Major Grain and Oilseed Exporting Countries (PDF version, 594 KB) - Help on PDF

Publication: 2142/B - ISBN: 0-662-32709-8 - Catalogue: A22-269/2002E-IN - Project: 02-007-r