View of Potential economic effects of climate change on Finnish agriculture

Potential economic effects of climate change

on Finnish agriculture

Lauri Kettunen

AgriculturalEconomics Research Institute,P.O. Box3,FIN-00411 Helsinki

In the assessment of the economic effects of climate change, changes inreturns and costs have to be taken into consideration.Changes inreturnsaremainlycausedby changes intheyieldlevel. Costs aredetermined byvarious factors. Harvesting conditionsmayimproveasthe temperaturesarehigh- er.^{However, anincreasing}need for disease and pest control resultsinhighercosts. Various extensive

studies^have indicated^thatrising temperatures with the C0₂fertilizingeffect increasethe crop poten- tial inFinland. From the economic point ofview an increase inyield level is highly significant, because the increase incostsremains quite ^small,A 10%increase^intheyield level raises the farm incomeby about6%.Becauseagriculture issupported inmany ways eitherdirectlyorindirectly,the rise in income level may be offsetby lowering the support. Consequently,farmers may not benefit from anincreaseintheyield level,but the benefit willgo to the state economy.However,anincreaseinthe yieldlevelresulting fromrising temperatures isadvantageoustothe national economy,regardless of whether the benefit goes to the farmers ortothe state.

Key words: policy changes, welfare effects

Introduction

The economic effects of climate change result from consequent changes in the yields of cultured plants. In the case ofFinland, ^recent studies of the SILMU programme (Mela ^et al.

1996) indicate that crop yields will increase, i.e.

the yield function will shift upwards. This hasa direct positive effect onthe economic result at farm level. However, there are also potential losses due^tocroppestsand diseases which have tobe taken intoaccount.

Inaddition tochanges in quantity, economic analysis requires an analysis of changes in the prices of theoutputand in thecosts of produc- tion. Changes in output prices are due to chan-

ges in supply, which may belocal, regional,or global (Parry ^et al. 1996). When changes in world food supply are taken into account, the economic analysis becomes quite complicated due to changes in trade flows and policy impli- cations (Rosenzweig and Parry 1994).

The SILMU programme has adopted time slice scenarios (years 2020, 2050, and2100) for the evaluation of the change in crop production

©Agricultural and Food ScienceinFinland Manuscript receivedFebruary 1996

due to climate change. Mean annual tempera- tureswill rise 1.1-6.6°C by 2100. Annual pre- cipitation will increase, ^too(Carter 1996). The study by Melaetal. (1996) indicates the follow- ing effects on crop production for Finland by 2050:

- Increased yields of adapted spring ^cereals, improved potential for the cultivation of high- er-yielding wintersown cereals.

- Increased grass yields duetothe lengthening growing season.

- Increased potential for yield losses due^tocrop pestsand diseases under climate warming.

The authors are cautious in giving any quanti- tative estimates of the increased yields and loss- es, which would be necessary for aneconomic analysis.

The aim of this paper is to evaluate the po- tential economic effects of climate change on Finnish agriculture based on the latest studies of the SILMU programme (Mela et al. 1996).

Since there are no specific scenarios of the change of yieldsavailable, _two examples of the economic effectson the farm level are present- ed. They are based on an assumed increase of the yield level and ^costsby 10%. These results canbe easily applied for any specific scenario which may be available after further studies on yield levels. The effect of policy changes due^to the altered demand and supply is considered. ^In addition, some earlier economic analyses are reviewed.

Economic analysis

Economic analysis has to be doneat the farm level(micro level)andatthecountrylevel(macro level). At the farm level prices are given and the farmer adjusts production according ^tothe prices of theoutputand inputs and the endow- mentsavailable. Prices _are determined by mar- ket forces and deliberate policy measures ofa country (orof the EuropeanUnion,EU). World market prices influence the national^{(or EU)}pric- esdepending onthe border protectionatthe time

of consideration. Price changes are caused by changes in supply. Difficulties arise in estimating price changes since the policy framework is going to change within the long time horizon considered. At_present the prices in Finlandare determined by the Common Agricultural Policy (CAP) of the EU. Prices are regulated, and a change in the world-wide market equilibrium may notaffect the internal prices of the EUatall. How- ever,in the long_{run a}change in the overall supply toworld markets may significantly affect the pric- espaidtofarmers.

Micro level

The economic effects ofclimate change comprise various factors. The change in the growing con- ditions affects the ability of plants toutilise the carbon dioxide in the air and the nutrients in the soil. In Finland the yield levels of cropsare ex- pected torise as aresult of the greenhouse ef- fect. The quantity of production per hectare will increase (Hakala and Mela 1996). Changes will oc- cur in the areas where crops can be cultivated, which alters the production structure (Carter etal.

1996). New high-yielding varietiescan be intro- duced in Finland and the optimum level of fertiliz- er usemay rise (Kleemola and Karvonen ^1996).

Consequently, theproduction potential may increase intwoways: as aresult of the increase in yield levels and duetointroduction of the_new high-yielding varieties. The pasture season is also going tobe longer, and thus pastures will produce ahigher yield aswell.

Climate change is notlikelytohave any dir- ect effects on livestock production. Milk pro- duction isnotdependenton temperatures aslong

asthere is adequate protection during the win- ter.Average yields do^notriseas aresult ofhigher

temperatures.

Climate change will affect thecosts aswell.

In the first place, changesoccurin crop produc- tion. Because of the longer growing periodtem- peratures arelikelytobe higher during harvest- ing. This could result ina decrease in the mois-

turecontent of harvested cereals and the costs for drying them will decrease.However,it is also

possible that the precipitation increases to the

extent that moisture content will not decrease and the dryingcostsremainatthesame level as earlier.Nevertheless, alonger growingseasonwill lower the risks involved in cereal production, especially during harvesting. Being able _to go tothe fields earlier in the spring usually results in higher yields, but the time of seeding is less likely ^tobe as significant for obtaining a good yieldasit is today.

It is assumed that risingtemperatures will be accompanied by moreplant diseases and pests, which is going to increase thecosts and slow down the rise in the yield level (Kaukoranta

1996, Carteret al. 1996).

The effect of the change in climate condi- tionson thecosts of animal husbandry remains small. Thepasture season will be longer, which may resultinareduction in foddercost.Because of the higher temperatures, some savings may be achieved in building costsas morelightlycon- structed animal sheds could be adequate, but this maynotbe very significant (Carteretal. 1992).

Macro level

The direct_macrolevel effects of climate change are not very significant, and for the mostpart they_aregoingtoresult from changes in themar- ket situation. The greenhouse effect is going ^to alter the supply of agricultural products.^In the present situation the definition of the domestic market isa little complicated. The question is to what extent the Finnish markets operate inde- pendently, or should wealways look at the is- sues from the viewpoint of the whole EU. From the standpoint of Finlandalone, climate change is going ^toresult in a considerable increase in supply and the price level will drop. At the EU level the changesaregoingtobe relatively small.

The effect of climate change is probably going to be positive in the northern countries of Eu- rope, butnegative in southerncountries, where many scenarios indicatean increase in drought frequency and increased problems ofwater sup- ply for irrigation (Flarrisonetal. 1995).

As cereals are easy to transport from one

countryto another,the impact of the production increase in Finland on the production (and the supply) of the whole EU remains small. This meansthat the price change would be very small and neednot be taken into account atall.

In crop production, plant breeding must be adjusted _to the _new situation. It is difficult to say whether this will^causeadditionalcosts.It is possible that there will be some increase inre- searchcosts,but the_costs of the actual breeding activitycan be considered^toremain ^atthesame levelasearlier. Thus changes will mainly occur in the allocation of research funds.

World level

Changes in the agricultural production ^at the global level influence the world market prices and, through these, the incomes of individual farmers. The study by Rosenzweig and Parry (1994)concludes that the greenhouse effect will leadtoasmall decrease in global crop production withrespectto the base scenario. The decrease is larger in the developing than in the developed countries (Reilly etal. 1994).This will inducea rise in the world market prices from24to 145%, depending on the climate scenario (Parry ^etal.

1996, Fischeretal. 1994).

Theextentof the reaction depends mainlyon how open the world markets are. The baseline assumption of the study by Parry ^etal.(1996) is that by 2020 there will be a 50% trade liberal- isation. Going towards 2050_or2100 the markets may be even more liberalised. This meansthat the price level ofcrops will be much higher than in 1995. The world-wide effect onprices in _an- imal production may be smaller, since the mar- kets are morelocal orregional and the price ef- fects do _not spread_as effectively_as in the _case of cereals.

Production

Yield level

The most significant consequence of the green- house effect in Finland is the rise in the yield

level. There are nooverall estimates of yield in- creases for the wholecountryand for all crops.

Warming alone decreases yields ofcurrentcul- tivars in Southern Finland. Combined with C0₂ increases, yields increase in all regions, themost in Central/NorthernFinland, and slightly in the south(Mela et al. 1996). Mukula (1988) and Rantanen (1988) estimated that the yields of spring wheat and barley will increase by 10-20%

undera 2xC0₂ climate change scenario.

Higher temperatures make it possible toin- creasethe _use offertilizers, which also _causes the yield leveltorise (Kleemola and Karvonen 1996). However,this option may notbe fully uti- lised. The reason for this is that at present a maximum level has beensetfor fertilizer use,if farmers aretobenefit from environmental sup- port. It is also possible that in the future fertiliz- er use will be restricted _{even more.} This_means that the yield function rises, but fertilizeruseis kept atanearlier level.

The adoption of^new varieties may also give higher yields. Preliminary estimates for barley yields by 2050 under the SILMU “best guess”

scenario oftemperature, precipitation, and C0₂ change, undercurrent N applicationrates gave yields increases of about 35%^at Jokioinen for anadapted variety (compared with 23% fora cur- rentvariety). For higher nitrogen application, the increase could beover40%(Kleemolaand Kar- vonen 1996).

Pasture season

The longerpasture season means higher fodder yields (Mela ^etal. 1996),butwater stress may restrict the increase if the climate dries in sum-

mer.This changecanbe taken intoaccounteither in the yield level estimates or the ^cost cal- culations. Estimating the total yield from pas- tures is usually quite difficult and it is seldom done, even if it would be possible on the ba- sis of e.g. livestock production. Due to vari- ations in weather conditions, annual estimates of the yield ofpastures present average figures which donotcorrespond tothe actual ^amounts.

Experiments under high C0₂ and increased

temperatures equivalenttochanges towards the end of thenextcenturyin Jokioinen and in Apuk- ka,Rovaniemi suggestincreases of meadow fes- cue yields over a wholeseason in the order of 20-100%, dependingon theseasonand location (see Hakala and Mela 1996, Mela_etal. 1996).

Areas

It is very difficultto estimate long-term changes in the distribution of cultivated land. In _a sit- uation of free competition theareas under culti- vation would grow along with improvements in profitability and comparative advantage. Under currentEUdirectives,the price policy, especially hectaragesupportaccording tothe CAP reform (Kettunenand Niemi 1994),determines themax- imum_areas for cultivation. It seems that over the very long term(say 50 years) increasing the cereal production in the world will becomenec- essary dueto global population growth. In this

case,the growth of production potential in the north is likelytobe utilised in full. However, in this connection it isnotpossible totake this into account,butwe must startfrom the assumption that theareas under cereals will not grow and the growth in crop production will be based on the increase in yield level alone.

The shift of cultivation_zones furtherto the northmeans, in particular, that the possibilities for the cultivation of cereals are going to im- prove_overthe wholecountry. Northward shifts

in thermal suitability for cereals are approxim- ately 100-150 km/°C warming _orabout 50 km per decade up ^to2050 under the SILMU “best guess” climate scenario (Mela etal. 1996). Be- causethe totalarea under cultivation is restricted within the present policy, it will only be pos- sibleto change the relativeareasof the different cropsso that the totalarearemains the same.In the longerrun, however arable landareais like- ly toincrease.

Production quantities

Changesin production concerncropproduction only. If theareasremain thesame,crop^produc-

tion will increase in proportion to the increase in the yield level. In this casethe change in the value of production canbe estimatedas an in- crease in thereturn on cropproduction. Natu- rally it is also possible that the higher crop pro- duction would be processed into livestock prod- ucts, in which case the increase in the value of the totalproduction would be considerably larg- er due to the increased value added (with cer- tainreservations, ofcourse). On the otherhand, quotas may restrict the growth in livestock^pro- duction in the short term (Kettunen 1995),but in the longer term, e.g. by 2050, these restric- tions, may notapply.

Economic effects

The following calculations have been done^atthe farm andstate level. At the farm level pricesare given and the farmer adjusts the production according tothe prices ofoutputand input and the endowments available. The pricesare deter- mined or influenced by the agricultural policy ofa country oreconomic region (like the EU).

Prices are also affected by the world markets depending on the closeness oropenness of the country or the economic region. The effect var- ies according the product concerned. Cerealsare easily transported around the world and, there- fore, climate change will affect the world mar- ket prices of cereals. The same applies^to beef and ^muttonprices, whereas the prices of other animal products may differ from oneregion to another and, thus, climate change may not af- fect the prices equally in all partsof the globe.

(Formoresophisticated methodstoevaluateeco- nomic effectssee Mendelsohnetal. 1994).

Assumptions

Since the estimates of the growth of the yield level and the change in the useof pesticidesare uncertain, twohypothetical examples of the ef- fects of climate changearegiven in Table

1.

models developedatthe Agricultural Econom- ics Research Instituteare applied for this pur- pose. The calculations arebased_onthe assump- tion ofa 10% growth of the yield level and a

10% increase in thecosts of plant protection.

These assumptions do not correspond to any scenario. However, these results can easily be appliedtoanyspecified scenario which gives the increase of yields and change in theuseof pes- ticides. In the following calculationsnochanges areassumedto occurin the prices.

The change in the yield level is the^mostsig- nificant factor in economic calculations. Eco- nomic effects _areestimated in the following as- suming thata) production growth corresponds to the increase in the yield level and b) no changes occurin theuseof inputs^exceptfor the increase in theuse of pesticides and additional harvesting costsfor the increased yield.

The base scenario is the situation in 1995.

The correctway would be todetermine theeco- nomic situation in the year corresponding ^tothe

10% increase in the yield level. This is^not yet possible. However, it does not affect thecon- clusion if prices arekeptconstant,as is done in this study.

Calculations

Farm calculations developedatthe Agricultural Economics Research Institute were originally used for examining the adjustment to member- ship of the EU in 1995 (Hiiva andAlastalo,per- sonal communication). The dataarefrom book- keeping farms,whichmeansthat the results can- notbe generalised for the whole _country.How- ever,they provide interesting information_onthe income development of individual farmsas the prices andamountofsupportvary. These calcu- lations _can also be applied for examining the effects of climate change atthe farm level. The figures for 1995 in Table 1 refertoaverages ofa group of crop anddairy farms.

In the calculations ofreturns, only the in- creasein yield is taken into^accountin estimat- ing the economic effects. For dairy farms, the increase in yield is assumed to lower feeding

TableI.Twoexamplesof thechange inthe farm income due to the 10%increaseinyields.

crop farm dairyfarm

1995 2050 (change) 1995 2050 (change)

Total area, ha 45.8 29.4

Totalyield,feed units 162 200 +l6220 68 700 +6870

Correspondingarea, ha 35.6 20.8

Yield,feed units per ha 4558 3304

Price of feedunit, FIM 0.90 0.70

Gross return,FIM

-crop 146 391 +l4639 317

-animalproducts 226 344 772

-subsidies 96 953 64 806

other 8289 4787

total 251 858 _+l4639 414 682

Costs

-drying 1207 _+Bll 1505

-plant protection1 ^{11 396 +1,140 1974 +197}

-purchased ^feed2 170 45 399 -4809

-other 209 088 266 299

total 221 691 +1951 269 778 -4612

Farm income 30 167 +l2688 144 904 +4612

Changein^% +42 +3.2

1Plant protection costs +lO%.

2for thedairyfarm the increase inyieldsis assumed to lower thefeedingcosts.

costs, and this is valued using the price of fod- der cereals(FIM0.70/kg). In thecoststhe changes in plant protection and drying the additional

crop (FIM 0.05/kg) are taken into account.At this _stageall other factorsareallowed_toremain asbefore.

The farm model calculation shows that in- comes increase (ceteris paribus) by about FIM

12 700 ^(42%) on the crop farm and ^FIM 4 600 onthe dairy farm due tothe 10% increase in the yield level (Table 1).

In the calculationno changesareassumed^to occurin prices and theamountsofsupport.This assumption will nothold in long-term forecasts.

Market forces are going to influence prices in many ways. The population grows rapidly, and it is questionable whether supplycan growatthe same pacein the longrun. Gradually it will be- comenecessary ^{to start}using marginal land for production, and this will leadto a considerable

increase in the production costs.There_arealso other factors that arelikely _to cause the prices

torise, and the increase ^musteither be paid di- rectly by theconsumers orit will leadtochang- esin the_structure of consumption. Even though the greenhouse effect has been estimated^tohave arelatively small impactonagricultural produc- tionat the global level, crop prices may rise a lot (Parryetal. 1996).

Estimates concerning agriculture as a whole

Amacrolevel study concerning the wholecoun- try canbe made simply by first estimating the value of the increase in the yield level by one percentage point. The crop production of the wholecountry has amounted to 5 200 million- -5 400 million fodder units(Kettunen 1995).The

price of barley, FIM 0.70/kg, canbe used asthe value of_a fodder unit. Using an average total yield of 5 300 million f.u., an increase in the yield level byone percentagepoint increases the return by about FIM 37 million. If the produc- tion increases by 10%, the benefit is FIM 370 million.

In Finland there is altogether about 120 000 ha pasture. The quantity of fodder units this yields canroughly be estimatedat 360 million f.u.,and thus its value would be about FIM 288 million. Ifanincrease in the yield is assumedto be 10%, the value of the longerpasture season could be 10%, i.e. FIM 28.8 million.

The totalcostof plant protection hasamount- edto about FIM 300 million^(Kettunen 1995).

This canbe expectedtorise by FIM 30-60 mil- lion. The harvesting ^costof the increased yield is about FIM 0.05/kg, i.e. about FIM 7.5 million for 150 million kg. The increase incosts is only 5% of the increase inreturns. The calculations ofreturns include a large margin oferror. The increase in costsremains quite small.

The total effect ofa 10% increase in the yield level is about FIM 360 ^million, i.e. 6% of the total farm income of FIM 6 000 million (see also Kettunen 1988).

Other estimates

Kuoppamäki (1995)has estimated the effects of climate changeonthe whole nationaleconomy,

and his study also includes a short chapter on agriculture. According to his study, by the year 2050 the benefittoagriculture will be FIM 1.255 billion, and in relation^tothe annual agricultural income ofFIM 6 billion the increase is 20%. This is basedon anincrease of the yield level by 40%, growth of horticultural production by 50%, and a decrease of 10% in thecosts of animal fodder as aresult of the longerpasture season.The es- timate is in line(a little smaller) with the esti-

mateabove.

The second method for estimating the bene- fits to agriculture presented by Kuoppamäki (1995) is also interesting. It is basedonthe price ofland,which heassumestoincrease along with

rising temperatures. On the basis ofa function estimated from_{a cross} section of dataoverFin- land: land price ⁼f(temperature). Kuoppamäki (1995) arrivesatanestimate accordingto which the benefit to agriculture is ^FIM 2.2 billion.

When the fertilizer effect of C0₂ is taken into accounta further multiplication factor of1.2 is applied and the total benefit is FIM 2.7 billion.

The methods presented by Kuoppamäki can be criticised for thepartconcerning the depend- encebetween the price of land andtemperature.

It might bemoreappropriate toestimate the de- pendence between the price of land and yield level. Even if thetemperaturesrise in the north- ern parts of thecountry,the production capacity of the land doesnot necessarily increase in the sameproportion.

Discussion

In theassessmentof the economic effects of cli- mate change, changes atthe farm level, i.e. in

returnsand costs,havetobe taken into consid- eration. Changes in returns are mainly caused by changes in the yield level,but yield quality may alsoimprove ifthe growing _seasonis long- erand thetemperatures higher. As thetempera- tures rise in Finland, the cultivation_zones of different crops may move furtherto the north.

New breedsor even newcrops may increase the

returns.

Costs _areinfluencedby various factors. Har- vesting conditions may improve as thetemper- aturesarehigher and the growing seasonis long- er,which reduces costs. However, an increasing need for pest control results in higher costs.

An increase in productivity increases the price ofland,atleast in principle, which also leadsto cost increases.

Inafree economy, increase in the supplyre- sults inadecrease in the price level. Ifwefocus onFinland only,asdistinct from othercountries, it canbe assumed that the price level will not change, asprices aredetermined for the whole

EU area. If the greenhouse effect is lookedat from the global perspective, the assumption is not true.The field crop production of the whole world is going to change, which inevitably af- fects world market prices. The effect on na- tional agricultural production depends on the border controls used. Changes in world market prices _arelikelyto influence the nationalecono- mythrough nationalsupport policies.

It is very difficult^to estimate the long-term development of cultivatedarea. With freecom- petition thearea under cultivation increases _as profitability and comparative advantage im- prove. Underpresent EU pricing policy, hec- tarage supportdetermines the maximumarea un- der cultivation. In the very long run (e.g. by 2050)the need for increasing cereal production in the world seems obvious due to population growth. In this situation the growing potential of the northern areas is likely tobe utilised in full.

Various extensive studies have indicated that

the greenhouse effect increases the crop poten- tial in Finland. The benefit is visible bothas an increase in crop production and ^as lowercosts in animal husbandry. From the economic point of view the increase in yield level is highly sig- nificant. It is almost pureincome, because the increase in thecostsremains quite small. A 10%

increase in the yield level raises the farm income by about 6%. In particular, the benefit will be important for cropproducers.

Because agriculture is supported in many ways either directly (direct income support)or indirectly (by tariffs or subsidies), arise in the income level may be offset by lowering the^sup- port.Consequently, farmers maynotbenefit from anincrease in yield level,but the benefit will go

to the state economy.However, an increase in yields resulting from rising temperatures is ad- vantageous tothe national economy, regardless of whether the benefit goestothe farmersor to the state.

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SELOSTUS

Ilmastonmuutoksen taloudelliset vaikutukset suomalaiseen maatalouteen

Lauri Kettunen

Maatalouden taloudellinen tutkimuslaitos

Kun arvioidaan ilmastonmuutoksen taloudellisia vai- kutuksia Suomen maataloudelle,onotettava huo- mioon sekä kustannusten että tulojenmuutokset. Tu- loihin vaikuttavat pääasiassa satotasonmuutokset, mutta kustannuksiin useat eritekijät. Korjuuolot ^saat- tavat muuttua suotuisemmiksikeskilämpötilan nous- tessa, mikäpienentääkustannuksia. Toisaalta olosuh- teet muuttuvatotollisemmiksimyöskasvitaudeille ja tuhoeläimille, mikäpuolestaan aiheuttaa lisäkustan- nuksia. Monet tutkimukset ovatosoittaneet, että ^läm- pötilan kohoaminen jailmanhiilidioksidipitoisuuden nousu lisäävätsatopotentiaalia ^Suomessa. Taloudel-

liselta kannalta satotasonnousu onhyvin merkittävä seikka, sillä samanaikaisestikustannukset kohoavat melko vähän: 10^%satotasonnousulisää tilantuloja 6^%.Koska maataloutta tuetaan monella tavoinjoko suorasti taiepäsuorasti, tulojen nousuvoijäädämer- kityksettömäksi tukien vähetessä. Tällöin satotason noususta aiheutuva lisätulo eihyödyttäisi viljelijää, vaan valtiontaloutta. Kohonneesta lämpötilastaaiheu- tuva satotasonnousu^onkuitenkin edullista koko kan- santalouden kannaltariippumatta siitä,saakohyödyn viljelijä vai valtio.