The common agricultural policy and wheat and barley acreage response in the UK under the CAP
In the early 1960's the European Union adopted the Common Agriculture Policy (CAP). This study explains the objectives, principles and developments of the CAP. Wheat and barley acreage response under the CAP is examined for eight production regions in the UK using time series-cross section data for period 1975-1995. This is the first study to examine the individual effects of prices and yields on cereals acreage in the UK separately. Attention is focused on alternative models of price and yield expectations. The performance of the resulting alternative price and yield forecast variables in estimation models are then compared. The study also examines the impacts of revenue uncertainty and recent changes in the CAP, including the set aside programs of 1988 and 1992, on wheat and barley planted acreage. Models in which expected prices were forecasted using ARIMA models and expected yields were forecasted by nonlinear time trend models provided most satisfactory results. The empirical findings indicate that wheat and barley acreage response is mainly explained by changes in the ratio of expected wheat yields to expected barley yields, by changes in relative prices and by variables that account for the set aside programs. The increasing gap between the wheat intervention price and threshold price together with developments in bread-making and wheat-washing industry also have had a significant positive impact on acreage planted to wheat and a significant negative impact on acreage planted to barley. The results further indicate that the CAP set aside programs have had a larger negative impact on barley acreage than on wheat acreage. Barley acreage planting decisions have been also more sensitive to changes in expected prices and revenue uncertainty than wheat acreage planting decisions.