Industrial Hemp in the Netherlands

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Title:
Industrial Hemp in the Netherlands The Effects of Changes in Policies and Subsidy Structures
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english
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Ronde, Sandra M
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University of Florida
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Master's ( M.S.)
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University of Florida
Degree Disciplines:
Food and Resource Economics
Committee Chair:
VANSICKLE,JOHN J
Committee Co-Chair:
BURKHARDT,ROBERT JEFFREY

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Subjects / Keywords:
cap -- dunagro -- fibres -- hemp -- hempflax -- netherlands -- subsidy
Food and Resource Economics -- Dissertations, Academic -- UF
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Food and Resource Economics thesis, M.S.
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theses   ( marcgt )
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Abstract:
Hemp as a crop has a long history. The first crops were already grown over 4,000 years ago. Industrial hemp is often confused with marijuana. Nevertheless, the applications are rather different. In the Netherlands, the hemp industry is still young and developing. This research examines what the consequences of recent policy changes are on the Dutch hemp industry. The main focus is laid on the elimination of processing aid and the consequences for processors. Through a two-input one-product multi-level market model the effect of subsidy elimination on prices and quantities of hemp straw and processed hemp is examined. Assuming there are no market failures, the quantities of hemp straw and processed hemp will decrease by six and twelve per cent. On the other hand,the prices of hemp straw and processed hemp will go down by nine and four percent respectively. Whether the hemp industry will survive in the Netherlands will depend on the determination and innovative mind of processors and the policy frameworks of both the Netherlands and the European Union.
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In the series University of Florida Digital Collections.
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Includes vita.
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This bibliographic record is available under the Creative Commons CC0 public domain dedication. The University of Florida Libraries, as creator of this bibliographic record, has waived all rights to it worldwide under copyright law, including all related and neighboring rights, to the extent allowed by law.
Statement of Responsibility:
by Sandra M Ronde.
Thesis:
Thesis (M.S.)--University of Florida, 2013.
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Adviser: VANSICKLE,JOHN J.
Local:
Co-adviser: BURKHARDT,ROBERT JEFFREY.
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RESTRICTED TO UF STUDENTS, STAFF, FACULTY, AND ON-CAMPUS USE UNTIL 2014-06-30

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lcc - LD1780 2013
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UFE0046379:00001


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1 INDUSTRIAL HEMP IN THE NETHERLANDS: THE EFFECTS OF CHANGES IN POLICIES AND SUBSIDY STRUCTURES By SANDRA MARIEKE RONDE A THESIS PRESENTED TO THE GRADUATE SCHOOL OF THE UNIVERSITY OF FLORIDA IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE UNIVERSITY OF FLORIDA 2013

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2 2013 Sandra Marieke Ronde

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3 To those I love unconditionally

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4 ACKNOWLEDGEMENTS Writing a diss ertation comes with times of procrastination, considerable insecurities, and a substantial amount of stress Nevertheless it also brings lots of liberty and freedom to plan, structure and design your own independent research project. After half a year of s truggling, thinking, deliberating writing, consulting, correcting, rewriting and so on and so on the light at the en d of the tunnel has suddenly become almost finished. Nevertheless, it is not completed without thanking those that have supported me along the way. First, I would like to express my gratitude to my supervisors Prof. Dr. VanSickle and Prof. Dr. Van Huylenbroeck My professors helped me to stay on the right track. Also my tha nks go to my other committee member, Prof. Dr. Burkhardt, who graciously c oordinated the Atlantis program on the American side of the Atlantic. Second, my appreciation goes to the supporting staff and faculty of the universities of Ghent, Humboldt, Pisa a nd Florida. Special thanks go to Martine de Witte and Jessica Herman. I would like to thank Martine for her role as materfamilias of the Atlantis Program and Jessica Hermann for her support and patience to guide me through the immigration and administratio nal issues I faced in the United States. I express my gratitude to the external parties that made it possible to both participate in the Atlantis Program and to finish my dissertation. A special mention goes to the European Commission and the Hendrik Mull er's Vaderlandsch Fonds that provided me with the financial support I needed in order to take part in the program.

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5 My final words of appreciation go to those that I carry closest to my heart; the old friends I have, the new friends I have made and my family that has always been there for me It is tempting to put special thanks in this section as well but I will refrain from doing so. They deserve public recognition but they do not need it. They give; not for credit but unconditionally. That is why I l ove them, that is why I will thank them; personally.

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6 TABLE OF CONTENTS page ACKNOWLEDGEMENTS ................................ ................................ ........................... 4 LIST OF TABLES ................................ ................................ ................................ ..... 10 LIST OF FIGU R E S ................................ ................................ ................................ ... 10 LIST OF ABBREVIATIONS ................................ ................................ ...................... 10 AB STRA CT ................................ ................................ ................................ .............. 11 CHAPTER 1 INTRODUCTION ................................ ................................ ................................ ... 12 Problem Statement ................................ ................................ ................................ 12 Objectives ................................ ................................ ................................ ............. 13 Structure ................................ ................................ ................................ ................ 13 2 HEMP AS A CROP ................................ ................................ ................................ 15 Hemp History ................................ ................................ ................................ ......... 15 Hemp versus Marijuana ................................ ................................ ........................ 16 Hemp Characteristics ................................ ................................ ............................ 18 Hemp Cultivation and Harvesting ................................ ................................ .......... 18 Hemp Processing ................................ ................................ ................................ .. 20 Hemp Applications ................................ ................................ ................................ 21 3 AREA OF FOCUS ................................ ................................ ................................ 25 Hemp in Europe ................................ ................................ ................................ .... 25 Hemp in the Netherlands ................................ ................................ ....................... 25 Policy in Europe ................................ ................................ ................................ .... 26 Historical Overview Policies ................................ ................................ ............... 26 Profit Maximization Function ................................ ................................ .............. 28 4 THEORETICAL FRAMEWORK ELIMINATION FINANCIAL SUPPOR T ............... 36 Literature Overview ................................ ................................ ............................... 36 Input Su bsidies ................................ ................................ ................................ .. 36 Starch Potato Subsidy Elimination ................................ ................................ ..... 38 Dutch Hemp Industry ................................ ................................ ............................. 39 Other Factors ................................ ................................ ................................ ........ 40

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7 Pass through ................................ ................................ ................................ ...... 40 Supply Side ................................ ................................ ................................ ........ 41 Demand Side ................................ ................................ ................................ ..... 44 Hypotheses ................................ ................................ ................................ ........... 45 5 TWO INPUT ONE PRODUCT MODEL ................................ ................................ 47 Choice of the Model ................................ ................................ .............................. 47 Assumptions ................................ ................................ ................................ .......... 48 Equations ................................ ................................ ................................ .............. 49 Graphical Analysis Payment Changes ................................ ................................ .. 52 Data ................................ ................................ ................................ ....................... 53 Financial Overview ................................ ................................ ............................. 53 Paramet er Values ................................ ................................ .............................. 54 Subsidy Two input One product Model Results ................................ .................... 54 Sensitivity Analysis ................................ ................................ ................................ 56 Hypot heses ................................ ................................ ................................ ........... 58 6 CONCLUSION ................................ ................................ ................................ ....... 66 Summary ................................ ................................ ................................ ............... 66 Implications ................................ ................................ ................................ ........... 67 Limitations & F urther Research ................................ ................................ ............. 69 Future Perspectives ................................ ................................ .............................. 70 APPENDIX A BREAKDOWN OF HEMP ................................ ................................ ..................... 72 B APPLICATIONS AND BENEFITS HEMP ................................ .............................. 73 C DERIVATIONS TWO INPUT ONE PRODUCT MODEL ................................ ....... 74 D RESULTS SENSITIVITY ANALYSIS ................................ ................................ .... 81 LIST OF REFERENCES ................................ ................................ ........................... 87 BIOGRAPHICAL SKETCH ................................ ................................ ....................... 90

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8 LIST OF TABLES Table page 2 1 Kilograms of hemp in automobiles ................................ ................................ ...... 2 4 5 1 Effects of subsidy on endogenous variables ................................ ....................... 59 5 2 Prices hemp straw ................................ ................................ .............................. 6 2 5 3 Turnover ................................ ................................ ................................ ............. 6 2 5 4 Parameter values ................................ ................................ ................................ 6 2 5 5 Subsidy model results ................................ ................................ ......................... 6 3 5 6 Effect subsidy on endogenous variables ................................ ............................. 6 3 C 1 Effect of exogenous shock on endogenous variables ................................ ......... 8 0 D 1 Sensitivity analysis effect EP Y ................................ ................................ ............. 8 1 D 2 Sensitivity analysis effect EP X ................................ ................................ ............. 8 2 D 3 Sensitivity analysis effect EP C ................................ ................................ ............. 8 3 D 4 Sensitivity analysis effect EY ................................ ................................ .............. 8 4 D 5 Sensitivity analysis effect Ec ................................ ................................ ............... 8 5 D 6 Sensitivity analysis effect EX ................................ ................................ .............. 8 6

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9 LIST OF FIGURES Figure page 2 1 Suitable clim ate zones for hemp cultivation ................................ ........................ 2 3 3 1 Acreage h emp EU27 in hectares ................................ ................................ ........ 3 2 3 2 50km radius around Oude Pekela ................................ ................................ ....... 3 3 3 3 50 km radius around Oude Pekela zoomed in ................................ .................... 3 3 3 4 Ac reage hemp in the Netherlands ................................ ................................ ....... 3 5 4 1 Price of wheat ................................ ................................ ................................ ..... 4 6 5 1 Graphical illustration ef fect abolishing processing aid ................................ ......... 6 0 5 2 Consumer and produce r surplus effects ................................ ............................. 6 1 5 3 Effect on X and Px ................................ ................................ .............................. 6 4 5 4 Effect on c and Pc ................................ ................................ ............................... 6 5 A 1 Brea kdown of hemp grown for fiber ................................ ................................ .... 7 2 B 1 A pplications and benefits hemp ................................ ................................ .......... 7 3

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10 LIST OF ABBREVIATIONS CAP Common Agricultural Policy CDSA Controlled Drug and Substance Act CGE Computable General Equilibrium EC European Commission EEC European Economic Community EU European Union THC Delta 9 tetrahydrocannabinol US United States of America

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11 Abstract of Thesis Presented to the Graduate School of the University of Florida in Partial Fulfilment of the Requirements for the Degree of Master of Science INDUSTRIAL HEMP IN THE NETHERLANDS: THE EFFECT S OF CHANGES IN POLICIES AND SUBSIDY STRUCTURES By Sandra Marieke Ronde December 2013 Chair: John J. VanSickle Co chair: J. Burkhardt Ma jor : Food and Resource Economics Hemp as a crop has a long history. The first crops were already grown ov er 4,000 years ago. Industrial hemp is often confused with marijuana. Nevertheless, the applications are rather different. In the Netherlands, the hemp industry is still young and developing. This research examines what the consequences of recent policy ch anges are on the Dutch hemp industry. The main focus is laid on the elimination of processing aid and the consequences for processors. Through a two input one product multi level market model the effect of subsidy elimination on prices and quantities of he mp straw and processed hemp is examined. Assuming there are no market failures, the quantities of hemp straw and processed hemp will decrease by six and twelve per cent. On the other hand, the prices of hemp straw and processed hemp will go down by nine an d four per cent respectively. Whether the hemp industry will survive in the Netherlands will depend on the determination and innovative mind of processors and the policy frameworks of both the Netherlands and the European Union.

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12 CHAPTER 1 INTRODUCTION Problem S tatement The Cannabis plant has gained significant interest over the past couple of decades T he Cannabis s ativa p lant is well known for its narcotic content. Nevertheless attention for the cultivation of hemp plants for other purposes has grown over the past several years. One of the reasons for the growin g interest in industrial hemp is its multi functionality. Hemp is a multi purpose crop since the seeds as well as the fibers and stal ks can be used for processing. On top of that, new applications for the processed products are being found continuously. Also hemp is a crop that is easy to grow an d does not require any pesticides or a substantial amount of water. Despite the potential o f industrial hemp, the Dutch industrial hemp sector is still considered to be in a stage of infancy and requires protection in order to develop further and to become competitive on the market. The assumption is that further investments in technology and processing are required to overcome the stage of infancy and to become cost efficient. Nevertheless, European policies regarding natural fiber production have c hanged significantly over the past three years. The question is what impacts will the se policy changes have on the Dutch natural fiber sector. The main focus lies on the con sequences for hemp processors. As of the implementation of Regulation (EEC) No 1 308/70 in 1970, the support of the flax and hemp market the European fiber market has been expanding. In the mid 1990s subsidization lead to speculative growth and an imbalance between hemp cultivated and hemp processed. Especially in Spain and also to som e extent in Ireland, farmers were growing fiber crops without having any intention of further

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13 processing. Hemp was solely cultivated for subsidies. Eventual ly the EU stopped providing subsidies to the respective growers Nevertheless, the large scale fiber subsidy fraud damaged the reputation of fiber growers significantly. The situation was restored partially by linking support to processing. Regulation (EC) 1672/2000 changed the subsidy structures for fiber s significantly in 2000. It lowered the direct su pport to growers to levels that were comparable to alternative crops. However, to keep supporting the natural fiber industry, direct support was given to primary processors of fiber s. Processors have been using the support to be able to offer the growers a competitive price in a market that was still young and developing. Nevertheless, the situation changed in 2012 when the processing aid was eliminated. It is the question what consequences this has for the Dutch hemp industry. Objectives The objective of this thesis is to assess the consequences of the 2012 changes in European fiber support program s under the Common Agricultural Policy (CAP). In 2006 Suijkerbuijk & Janszen published a report that examined the potential for industrial hemp in the Netherlan ds. Also De Bont, Jager & Janssens (2008) conducted a research that looked at the consequences of the elimination of support on hemp cultivation in the Netherlands. Nevertheless, an up to date report on the elimination of processing aid and the consequence s for Dutch hemp processors specifically is still missing. This research attempt s to fill the ga p by focusing on the consequences for the processors. Structure In order to provide a basic understanding about the significance of hemp as a crop, Chapter 2 is devoted to explaining the history, characteristics and applications of hemp. Also it provides information about the cultivation, harvesting and processing

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14 of the Cannabis sativa plant. Chapter 3 lays out the basics for the area of focus. It outlines the characteristics of the hemp industry in Europe and, more specifically, in the Netherlands. Also it gives an overview of the policies in place in Europe and the Netherlands. The geographical as well as the policy information is re quired in order to draw conclusions about the results of the analysis done later. Chapter 4 forms the theoretical basis for the model that will be explained in the next chapter. It analyse s theory on the elimination of subsidies Also it outlines earlier r esearch on the potential for fiber crops in Europe and the Netherlands. On top of that, the views of both hemp growers and hemp processors are outlined in this section. Together, the theoretical background provides the hypotheses for Chapter 5. Chapter 5 t ests the hypotheses of the previous chapter by means of a two input one product multi level market model. Also it show the results of the sensitivity analysis conducted. Lastly, in Chapter 6 the results are summarized and conclusions about the prospects fo r the hemp industry in the Netherlands are drawn.

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15 CHAPTER 2 HEMP AS A CROP Industrial hemp is a crop about which many misconceptions exist. Although little res earch is conducted into the perception of hemp Luginbuhl (2001) wrote about the foundations of the nega tive associations with the Cannabis plant Automatical ly, fiber hemp is often linked to marijuana. Nevertheless, the applications of industrial hemp are completely different. In order to avoid misconceptions and to be able to asses s the value industrial hemp can have for society as a whole this chapter is devoted to outlining the basics of the industrial hemp industry. It will shed a light on the history of hemp, the cultivation, harvesting and p rocessing of the product, hemp appli cations and the value of hemp for society Hemp H istory Hemp, Cannabis sativa L. can be distinguished between industrial hemp and marijuana. The plants look identical. The one difference is the psychoactive delta 9 tetrahydrocannabinol (THC) content (Ran dall Fortenbery & Bennett, 2004 and Vantreese, 1998). This research will primarily focus on the industrial hemp industry. Therefore, for simplicity, when talking about hemp we refer to industrial hemp. If psychoactive hemp is being discussed this will be referred to as marijuana Years before farmers started growing flax and cotton hemp was already cultivated. It is one of the oldest crops still existing. It is estimated t hat the first crops were grown between 4,000 and 6,000 years ago in China. Around 1500 the Europeans started importing hemp from China. Widespread cultivation in Russia as well as Great Britain followed soon. Also in the United States the production of hem p grew exponentially until it started to face strong competition from cotton jute and

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16 abaca in the 19 th century. Eventually, under the Marijuana Act of 1937 hemp was placed under the control of the U.S. Treasury Department. Effectively this development le d to a ban on hemp product ion in the United States in 1938 (Randall Fortenbery & Bennett, 2004 : 98). In Canada hemp was prohibited under the Opium and Narcotics Act in 1938. T he cultivation of hemp in the United States is still barred by the US Drug Enfor cement Agency In Canada the Controlled Drug and Substance Act (CDSA) legalized the production of hemp in May 1997 The Industrial Hemp Regulations of the CDSA require the monitor ing of the cultivation of hemp. To date, farmers need a license issued by Health Canada in order to grow import or export hemp. On top of that, permits for each shipment are required. Also only s eeds that are certified by Health Canada are allowed to be used. Regular unexpected controls on THC content of plants apply. Hemp plan ts in Canada must have a THC content that is smaller than 0.3 per cent The Canadian government does not provide any extra support to the hemp industry (Amun Laate, 2012) The policies regarding industrial hemp are different in the Europe. France, for instance, has never prohibited the production of hemp. The Unit ed Kingdom legalized it in 1993, the Netherlands in 1994 and Germany followed in 1996. T he European Union (EU) has supported the growth of hemp and other natural fibe r s like f lax since u nder the Common Agricultural Policy (CAP) Hemp versus M arijuana A ccording to DeMeijer et al. (1992) only laboratory tests can differentiate between hemp and marijuana. Mariju ana contains on average three to fifteen per cent THC whereas the THC content in industrial hemp is generally lower than one

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17 per cent The issues related to the similarity of the two varieties will have to be discussed in order to highlight possible obstacles to the development of the industrial hemp ind ustry. The U.S. government made the cultivation hemp in 1938 because it was considered a threat to society due to its resemblance with marijuana. Under the United Nations 1961 Single Convention on Narcotic Drugs, the North American Free Trade Agreement, a nd the General Agreement on Tariffs and Trade hemp is distin guished from marijuana. Still U S law does not make the distinction between the two different Cannabis plants. Consequently, there are many misconceptions about the applications for hemp in the Uni ted States (Luginbuhl, 2001) Although there are still lots of misunderstanding s the general perception of hemp in Europe is more positive than in the United States. Possibly, the fact that hemp cultivation is legal in Eur opean countries contributes to a more positive and informed environment. European f armers that grow hemp have to comply with strict EU regulations. Only full time farmers are allowed to produce hemp. It is compulsory to seed a variety that is certified and ha s a THC content of less than 0.2 per cent (Vantreese, Hemp Support: Evolution in EU Regulation, 2002 : 3.) In the Netherlands, the Food and Consumer Product Safety Authority is responsible for doing random THC control check s in the fields. Checks are conducted between twenty days before and ten days after the flowering of the hemp seeds. T he crop can only be harvested when the authorities give their consent after having f inished all random field checks (Dienst Regel ingen, 2013)

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18 Hemp C haracteristics Most of the Cannabis sativa plants are dioecious. This means that there are separate male and female plants. Nevertheless, monoecious varieties have been developed through selection program s. The quality of fiber of dioecious varieties differs significantly. Monoecious varieties offer more uniformity in quality. However, there exist fewer monoecious varieties than dioecious. Countries like Russia, China, Romania, Hungry, France and the Netherlands have set up different breeding program s to develop the seeds that are most productive in the ir respective climates. Some countries focus on breeding plants that generate a high yield in seed production. Others focus more on fiber production. The main factor determini ng the purpose of production is climate. In countries with milder, usually sea climates the summers are not long and warm enough for seed production. Hence, in the respective regions hemp is mainly grown for fiber production (Vantre ese, Industrial Hemp: Global Operations, Local Implications, 1998) Hemp is a multi purpose product. The seeds and the interior as well as the exterior parts of the stalk are processed. The bast of the plant can be compared to other fiber plants lik e jute, flax and kenaf. The inner part of hemp contains fiber s that are thicker and woodier. They are also referred to as hurds. The seeds of hemp are rich in oil. On average the percentage of oil is 29 to 34. Content wise h emp oil can be compared to linse ed oil (U.S. Department of Agriculture, 2000) Hemp C ultivation and H arvesting Hemp is a crop that is relatively easy for farmers to grow. Hence, the crops can be cultivated i n many areas over the world ( Figure 2 1 ). Hemp plants only need nitrogen, water and sunlight to grow. Also hemp is immune to most plant diseases. Because of its high growth density, hemp leaves no space for weed s to grow.

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19 disease immunity and growth density contribute to a reduction in the use o f pesticides and herbicides. Not only can this be advantageous for hemp but when crop diversification is applied it will also reduce the herbicide use of other crops grown on the same plot (Beerepoot, 2003) When rotated with starch potatoes, hemp can positively contribute to more sustainable potato cultivation. Hemp plants overgrow herbicides As a consequence it reduces the number of harmful nematodes, Colorado beetles, viruses and greenflies in the soils. Also the deep root ing, and relative late harvesting of hemp reduces sand drifts. Lastly, hemp leaves more organic matter on the ground than potatoes and grain. This provides a positive effect on the soil structure (Beerepoot, 2003) The pla nting strategy is dependent on the purpose of growing. When hemp plants are cultivated for fiber production the aim is to maximize the stalk size. Consequently, dense plant ing population is required. When grown for seed or for both seed and fiber the plan ts are planted further apart from each other to allow for branching and the development of seeds. Because hemp fiber s are very strong, mowing can be challenging and more intensive than regular mowing (U.S. Department of Agriculture, 2000) Fiber hemp is harvested earlier in the season than hemp grown for the seeds. The main reason for early harvest is to allow for dry retting. Retting is the microbiological process of separating the stem from the bast of the hemp plant. Usually this chemical breaking of the fiber s and woody parts is done on the fields. After harvest, the hemp is let on the fields to ret. The plan required some humidity to rot and break down. However, the crop should remain dry enough to allow for bailing. Also t oo muc h humidity affects the quality of the fiber s negatively. Because the

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20 summers in the northern parts of Europe, including the Netherlands, are usually shorter than i n the southern parts, hemp is harvested earlier in the season Because hemp seeds take longer to grow, one of the consequences of the Dutch climate is that hemp for seed production is not practiced in the Netherlands (Struik, Amaduc ci, Bullard, Stutterheim, Veturi, & Cromack, 2000) Hemp P rocessing Hemp is a multi purpose product. After the stalks of the hemp plant are retted, dried and baled they are transported to the processing company. Here, the inner woody part s are separated from the fiber s through processes called breaking and scutching (U.S. Department of Agriculture, 2000) HempFlax (2013) refers to the first process of separating the fiber ext process, fiber fiber s further to process the large fiber s into smaller bundles. The degree of refining depends on the quality required. Paper grade fiber s are the least sophisticated type of fiber s. Insulation grade fiber techni cal, automotive grade fiber and textile grade fiber in the respective order, require higher quality fiber (HempFlax, 2013) The ratio between seeds, dust, fiber s and hemp straw generated from processing hemp differs and is dependent on the main purpose for harvesting. Dutch hemp, for instance, is produced for its fiber s. Hence, seeds are omitted in the revenue data. Ac cording to Gjaltema (2013) 1 HempF lax produces on average 500 kilograms of shives, 250 kilograms of fiber and 250 kilograms of dust out of a ton of hemp straw. Appendix A shows the average break down of hemp plants that are cultivated for fiber production. 1 Personal communication

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21 Hemp A pplications The first copies of the B ible were written on hemp paper (Ranalli & Venturi, 2004) Also hemp was used in the 17 th century for textile production. Nowadays, houses have also been constructed from the Cannabis plant (Haars, 2012) To date, more and more applications for hemp are being discovered. Appendix B give s a schematic overview of the different applications for hemp. In the 1990s hemp fiber s were predominantly used for specialty pulp and paper. On the European market 55% of the hemp fiber s are still processed into pulp and paper. 25.9% of the fiber goes to the production of isolation materials. Hemp isolation has some benefits with respect to the glass or mineral wool alternative s. It does not irritate like glass fiber s. Also in terms of moisture flow and heat capacity hemp outperforms alternative isolation materials. However, hemp isolation is still 2 to 4 times more expensive than glass and mineral wools. Therefore, large scale marketing is not applicable yet (Carus, Karst, & Kauffmann, 2013) In Europe, 14.4% of the hemp fiber s end up as bio composites. The main share of bio composites, 96%, consisted of automotive interior products. Germany is the leader in the field of hemp interior products. Also the industries in France and the Czech Republic use hemp fiber s for cardboards (Carus, Karst, & Kauffmann, 2013) Currently, Fiat, Ford, Mercedes Benz, Opel, Peugeot, Renaul t, Volvo and VW car components consist partially of natural fiber s. Table 2 1 specifies the application of natural fiber s in automobile parts further. The expectation is that the market for paper and pulp will not increase significantly over the next dec ade. Nevertheless, the demand for hemp isolation materials and bio comp osites is expected to increase Due to the shorter seasons in Northern Europe, seeds do not generate any revenue there. In the south of Europe,

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22 seeds are a by product. Hemp production m ainly for the seeds only occurs in Asia and Canada. Therefore, seeds are left out of the equation in this thesis (Carus, Karst, & Kauffmann, 2013) At this moment the most common uses for hemp fiber s in the Netherlands are paper and dashboard for the automotive industry. Just like at the European market, th e hurds are mainly processed for pet and horse bedding Dun Agro is experimenting with techniques to utilize the hemp leaves for shakes. If this succeeds a new market can be added to the product line (Suijkerbuijk & Janszen, 2006) Hemp has a broad history. Although it is directly related to marijuana, the narcotic content and applications of the crop are very different. Hemp is a natural subst itute for both synthetic and other natural fiber s. In Europe most of the hemp goes to the paper and pulp, the automotive and the isolation industries. European hemp processors expect the demand for hemp building materials, hemp shives, and lime to increase On the other hand, stagnation in the markets for bedding materials a pulp and paper is expected. Nevertheless, the growth of the hemp industry will also be dependent on economic and political factors (Carus, Karst, & Kauffmann, 2 013) The specific political and economic issues will be discussed later. First, the area of focus is explained.

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23 Figure 2 1 Suitable climate zones for hemp cultivation. Reprinted by permission from HempFlax (2013), Retrieved July 24, 2013, from www.hempflax.com

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24 Table 2 1 Kilograms of hemp in automobiles. Source: Holmes (2005) Front door liners 1.2 1.8 kilograms Rear door liners 0.8 1.5 kilograms Boot liners 1.5 2.5 kilograms Parcel shelves < 2 kilograms

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25 CHAPTER 3 AREA OF FOCUS Hemp in Europe Within Europe, France is the main producer of industrial hemp ( Figure 3 1 ). Also Germany and the United Kingdom are main producers. Since the climate is slightly more advantageous in the southern part of Europe, the Mediterranean countries can also harvest hemp seeds generating extra added value from one product. Hemp in the N etherlands The industrial hemp sector in the Netherlands started to develop in 1993. The first hemp was grown in Nagele in the Noordoostpolder. In 1994, production shifted to the Veenkolonin ; a region in the north eastern part of the country. The HempFlax Group was founded in the town of Oude Pekela. Their aim was to set up an industry that was concerned with the cultivation and processing of fiber s like flax and hemp Because the processors take care of the harvest of hemp straw the cultivation of hemp takes place in a radius of fifty kilometers around Oude Pekela (Hempflax, 2005) Figure 3 2 and Figure 3 3 illustrat e the location of Oude Pekela in the Netherlands and the fifty kilometers cultivation radius around Oude Pekela. Like becomes clear from Figure 3 3 a substantial area within the fifty kilometers radius lies in Germany. Due to the common European market, th is does not direct ly have an effect on the consequences of the elimination of processing aid. Nevertheless, indirectly it could be harmful for the hemp industry. The issues related to that are discussed in section in Chapter 4. 1

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26 The scale of produ ction in the Netherlands has been modest so far A pproximately 800 hectares was cultivated in 2000 In 2002 this expanded to more than 2000 hectare s Between 2004 and 2006 hemp almost disappeared in the Netherlands due to the termination of contracts between growers and processors and the bankruptcy of the only processing company Hempro ( Figure 3 4 ) (de Bont, Jager, & Janssens, Vlas en vezelhennep en herziening van het EU beleid, 2008) When the hemp industry declined to l ess than 500 hectares from 2004 08 the possibilities for the continuation of hemp growth in the Peat Districts. 2 Albert Dun took on the C rted the industry in the North e ast area of the Netherlan ds. HempFlax restarted its businesses as well also in the town of Oude Pekela. In 2013, Dun Agro and HempFlax we re the only two commercial hemp wa s estimated to be 4000 hectares annually. Nevertheless, less than half of the potential is currently cultivated 3 T he question is whether policy d evelopments will further downscale production or, as stated by HempFlax employees, that production will continue to rise due to an increase in demand for hemp products and technological development. 4 Policy in Europe Historical O verview P olicies Cultivat ion of natural fiber s has been supported by the EU since 1970. The aim of the support policies has been to create a natural fiber sector that is able to compete against the synthetic fiber and cot ton industries. The initial support was 2 Suijkerbuijk & Janszen (2006) 3 Personal communication with Berg (2013) 4 Personal communication with Mellema ( 2013)

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27 based on the acreage of sown hemp (or flax). The yie ld per hectare was irrelevant to the amount of subsidy. Per hectare subsidies up to 450 euros were provided. Fifty per cent of the subsidy per hectare was received by th e grower directly. The other fifty per cent went to the processor. In 1998 Spanish and Irish farmers made use of loopholes in the fiber subsidies schemes. Farmers sowed flax seeds in order to obtain fiber subsidies. Nevertheless, although the seeds were planted, the plants were burnt down or left unharvested. The subsidies did not support the development of the sector in any way. When Brussels found out what farmers did with flax subsidies it brought the whole natural fiber sector negative publicity (Hempflax, 2005) To prevent misuse in the future the EU flax and hemp support schemes changed. In order to be eligible for a subsidy a contract had to be set up between growers and processors in accordance with what is currently referred to as Commission Regulation (EC) No 507/2008 (Hoofdproductschap Akkerbouw, 2011) In 2000 the subsidy structures for hemp were reformed again As of 2001/02 processors received an extra 90 euros per ton fiber s processed. The hectare premium for growers became pegged to the grain yield in the respective region. In 2006 the support was decoupled from grain prices (de Bont, Jager, & Janssens, Vlas en vezelhennep en herziening van het EU be leid, 2008) In 2012 the payment structures were again reformed significantly for both processors and farmers. The consequences of these reforms will be the basis of the analysis for this research. For processors the direct support was eliminated ton of processed hemp as of 2012.

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28 According to the Dienst Regelingen (2013) the only two Dutch hemp processors, Hemp F lax and Dun Agro, received respecti in subsidies from the European Commission during the last year the subsidies were provided For farmers, regulations changed as well. Until 2012, support was pegged to the production of hemp. As of 2012 this was transformed into a direct payment system based on hectares of land cultivated. One of the consequences for hemp farmers is that they will receive a fixed hectare premium regardless of what crop is cultivated on the land whereas the previous subsidy was based on hectares o f hemp grown. In other words, farmers have less of an incentive to grow hemp. Profit Maximization F unction The profit maximization function for hemp cultivation is changing. Pre 2012 farmers that had traditionally been growing hemp could choose between tw o competing m aximization function s : Max. Max. Max. and Max. are the maximization functions for growing hemp and an alternative crop respectively. X is hemp straw, the subsidy per hectare of hemp and c the cost. is the price of an alternative crop. Since the direct payments are still coupled to the production of hemp, is added to the maximization function of hemp. P ost 2011 the maximization function of gro wing hemp changed to: Max. Subsidies have been decoupled and transformed into hectare premiums. Because hectare premiums are paid out irrespective of the crop that is being

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29 cultivated, there is no subsidy differentiation any more between growing hemp or alternative crops. Hence, the subsidies have been taken out of the post 2011 equations. The direct consequence of the change in subsidy regime is significant. Since subsidie s are no longer part of the equation, when maximizing profits farmers now only compare the price of hemp minus the marginal costs with the price of alternative crops minus its marginal costs. De Bont, Jager, & Janssens (2008) consider grain (wheat) due to its growing characteristic to be the most s uitable farming alternative to hemp. The marginal cost of wheat are assumed to be fairly similar to the marginal cost of hemp. Consequently, the main determinant for farmers in choosing which crop to grow i s the sales price of their crops. In order to guarantee a smooth transition 2012 was signified as a transition year. The support for processors already ceas ed to exist. However, European hemp on a total of 3001 hectares of fiber crops grown in the Netherlands in 2011. Fiber hemp constituted 892 ha in 2011. Therefore, in total, Dutch hemp growers received 5 As of 2012 hemp farmers receive a hectare premium based on the registered hectares of cultivated hemp in 2008. For 2013 the reference value for hemp per hectare in the Netherlands wa 3 (Dienst Regelingen, 2013) Additionally, farmers we re paid regular hectare premiums. Initially, hemp farmers 5 Personal communication with Mr. De Sturler (2013) from the Dienst Regelingen (Dutch National Service for the Implementation of Regulations at the Ministry of Economic Affairs, Agriculture and Innovation).

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30 receive d more financial support. However, the assumption is that with the new CAP beginning in 2014 support will be gradually reduced Because the support after the transition phase is not coupled to the production of hemp, it is hypothesized that hemp growers will monitor the market more closely to search for other more profitable crops. Besides direct support for farmers and processors, there are indirect policies that could support the development of the hemp industry. The industry could potentially profit from what is referred to as the greening of the CAP. There is a continuous trend in Brussels to support farmi ng initiatives that contribute to a greener, more sustainable EU. Hemp is a bio based product. Hence, it should theoretically benefit from the EU aim of greening the CAP. Nevertheless Carus, Karst & Kauffmann (2013 : Fiber industry is suffering There are two main reasons the hemp industry does not benefit from the greening policies. First of all, it is mainly biofuels and bio energy that are being supported with green electricity regul ations, tax incentives, and set biofuel and renewable energy quotas. In contrast, bio based materials like hemp products are not as heavily supported. This creates unfair competition (Carus, Karst, & Kauffmann, 2013) Also, t here is no European protection from the import of fiber s from mainly Asia. Cheap import of jute, kanaf and sisal from countries that do not have acceptable social and environmental standards is disadvantageous for the European fiber industry. In order to g uarantee fair competition the European Industrial Hemp Associa t ion (EIHA) is therefore pleading for sustainability certification of hemp (Carus, Karst, & Kauffmann, 2013)

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31 The political landscape in w h ich the European hem p industries are operating is constantly changing. Direct and indirect forms of support were available for different actors in the industry. Nevertheless, direct support coupled to hemp cultivation and processing has been eliminated completely. Indirect su pport for creating a so called green and bio based economy is currently not necessarily advantageous for the industry. This section has outlined the hemp policies in place. Chapter 4 will continue with outlining research that has been conducted in order to assess the consequences of the policies on the Dutch hemp industry.

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32 Figure 3 1. Acreage Hemp EU27 in hectares. Reprinted by permission from Carus, M., Karst, S., & Kauffmann, A. (2013), The European Hemp Industry: Cultivation, processing and applications for fiber s, shivs and seeds. European Industrial Hemp Association (Page 2, Figure 1)

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33 Figure 3 2 50km radius around Oude Pekela

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34 Figure 3 3 50km radiu s around Oude Pekela zoomed in

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35 Figure 3 4 Acreage Hemp in the Netherlands. Adaptation from CBS. (2013, February 14), Landbouw; gewassen, dieren en grondgebruik naar regio Retrieved March 18, 2013, from Centraal Bureau voor de Statistiek: www.cbs.nl 0 500 1000 1500 2000 2500 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Acreage hemp the Netherlands in hectares

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36 CHAPTER 4 THEORETICAL FRAMEWORK ELIMINATION FINANCIAL SUPPORT Literature O verview In order to evaluate the consequences of policy changes in the hemp sector, the complete industry n eeds to be examined. This section first describe s what research has been conducted related to the elimination of subsidies in general. Second an outline of research into the hemp industry in the Netherlands is provided Then, other factors that influence the sector like the passing through of support, will be discusse d. This chapter finishes with an outline of the hypotheses th at will be tested in Chapter 5. Input S ubsidies Whereas the rational is different, the effects of abolishing processing aid can be compared with agric ultural input subsidies. Usually, agricultural input subsidies are introduced to improve the affordability of inputs or to encourage farmers to utilize specific primary products Agricultural input subsidies are most common in developing countries. In the case of natural fiber s the processing aid was introduced to counteract the misuse of subsidies by growers. Despite th e difference in purpose, the consequences of abolishing processing aid on endogenous variables can be compared to the elimination of an input subsidy. Hence, the theoretical framework around the consequences of eliminating input subsidies will be discussed in this section. Takeshima and Lim Lee (Agricultural inputs subsidy and their developmental impact: Conventional wisdom, 2012 : 1) a payment, generally made from public resources, that reduces the price that a buyer pays for a good or

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37 Elimination of agricultural input subsidies usually decrease s the quantit y demanded of the good that was subsidized. S ubsidies are assumed to cause market distortions. Payments lead to inefficiencies when for instance good are subsidized that would be produced regardless of the subsidy. Also governmental payments can generate d eadweight losses. Deadweight losses are created when the total cost of implementing a subsidy are greater than the aggregate benefits. The size of the deadweight loss depends on the elasticity of demand and supply. The higher the elasticity of demand, the greater the deadweight loss is assumed to be. If the elasticity of supply is small chances are great that the benefits of the subsidy do not end up at the receiver but by the supplier of the input. In the case of processing aid this implies that when the e lasticity supply of hemp straw is low subsidy benefits are transferred from processors to growers (Takeshima & Lim Lee, Agricultural inputs subsidy and their developmental impact: Conventional wisdom, 2012) More on the pass through of support is explained in section 4.3.1. Takeshima and Lim Lee ( Exit strategies for and potential alternatives to agricultural subsidy programs, 2012) discussed the exit strategies for agricultural input subsidy prog ram s in Mozambique in a different policy note for the International Food Policy Research Institute They assert that it is hard to reduce subsidy program s without negatively affecting the input markets. The aim of an input subsidy program should be to enab le receivers of subsidies to acquire an economically independent position on the market. In other words, support ought to have a clear aim and exit strateg y to avoid substantial negative effects on the input market.

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38 Starch P otato Subsidy E limination Although there are many examples of subsidy elimination, the most up to date and relevant example is the elimination of starch potato subsidy. Zijlstra et al. (2011) examined the consequences of the abolishing of starch potato subsidies. The resear ch is si gnificant to the study of the Dutch hemp industry as well because although the type of crop is different other factors are rather similar. First, the starch potato industry in the Netherlands is also centered around the Peat Districts. Second, the EU sta rch potato subsidy scheme is comparable to the natural fiber payment policies. Like with natural fiber s, payments were provided to growers as well as processors. Also, just like hemp, the payments to growers were decoupled and subsidies to processors elimi nated in 2012. According to Zijlstra et al. (2011) 25% of the starch potato growers interviewed indicated they will keep production at the same level after t he elimination of the subsidies. The interviewees expect that the reduction in acreage has conseque nces for the only Dutch potato processor AVEBE. Most likely, one out of th e three factories will shut down. Nevertheless, the starch potato market is larger than the hemp industry. Whereas the average acreage of hemp grown is 1,000 hectare, approximately 5 0,000 hectares of starch potatoes are cultivated each year. 85 per cent of the starch potatoes in the Netherlands are cultivated in the Peat Districts. 40 per cent of the arable land in the Peat Districts is used to grow starch potatoes. To summarize, t he expected consequences of the elimination of payments to starch potato farmers and processor s are that the starch potato acreage will be reduce d and the profit of the processor AVEBE will shrink. Also the price of starch potatoes will most likely become more volatile (de Bont, Blokland, Prins, Roza, & Smit, 2007)

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39 Dutch H emp I ndustry In 2006 after the bankruptcy of HempFlax the hemp in dustry in the Netherland was virtually non existent. T he Agenda voor de Veenkolonin 1 decided to request a re evaluation of the potential for hemp cultivation in the Peat Districts. Suijkerbuijk and Janszen (2006) evaluated the possibilities for the indust ry. The main conclusions were that i n order to generate positive business results for hemp process ors, more research was required. Secondly, the greatest threats for the hemp processing sectors were market acceptance and unproved technology The last concl usion was that h emp processing did not directly generate profit. Nevertheless, it is possible that when the industry as a whole is observed, hemp can be more profitable than alternative crops (Suijkerbuijk & Janszen, 2006) Like has been mentioned in Chapter 3 the results of this study lead to the revival of the hemp industry in the Netherlands. Almost a decade later and after significant changes in EU support policies, it is the question which of the conclusions still holds At the request of the Dutch Ministry of Agriculture, Nature and Food Quality (nowadays the Ministry of Economic Affairs, Agriculture and Innovation) De Bont, J ager and Janssen (2008) examined the consequences of subsidy changes for the Dutch flax and hemp sector. The main focus was laid on the consequences for the cultivation and processing of the products and the impacts on affected regions in the Netherlands Their main conclusions w e re that the decreased support for hemp farmers and processors may lead to a stop in the development of the Dutch hemp 1 In E nglish: Agenda for the Peat Districts; a collaboration between the provinces of Groningen and Drenthe, the municipalities Aa en Hunze, Borger Odoorn, Emmen, Hoogezand Sappemeer, Stadskanaal, Pekela, Veendam, Vlagtwedde and the water board districts Hunze e Vecht to strengthen the socio economic position of the Peat Districs.

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40 sector. In the worst case scenario the sector will disappear completely. Alternatively, the processing industries could stay in the Nethe rlands when supply comes from other countries. De Bont et al. (2008) assert that the small scale of the hemp sector is a barrier to R&D investments. Generally, the infancy of the sector makes it difficult to say anything about future prospects The demand looks promising. Nevertheless, the question is whether it will remain possible to offer competitive prices for hemp straw in order to sustain the supply. Other Factors Pass through To assess the impact of the elimination of processing subsidies it is essen tial to examine where aid ends up. There are three different possibilities. First, processing aid can be passed back to growers fully or, part of the aid can be passed through. The last option is that growers do not receive any of the processing aid. An derson and Martin (2009 ) describe how protection to processors can be passed through completely to the agriculture sector As a consequence, the support divided by the proportional contribution of the primary product to the value of the processed product (Anderson and Martin, 2009 : 451). When processing takes place in a country other than where the primary production occurs, it is possible that aid is not passed back at all. However, Anderson and Martin (2009) state that when the price elasticity of farm supply is positive and the primary product itself cannot be traded directly it is highly unlikely there is no passing through occurs Hemp growers are inclined to suppl y more when the price

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41 increases The elasticity of hemp straw is positive and therefore i t is likely there is some passing through effect. Discussing the possibilities for the passing through of subsidies, Anderson and Martin (2009) describe a third option in which only part of the support is passed back to growers. In this case the benefits of the subsidies are shared more equally along the complete value chain. Supply S ide In order to determine the elasticity of supply required for the mult i level market analysis, this section will discuss the indicators of supply. The information provided is based on interviews with both hemp growers 2 and hemp processors 3 and existing literature. On average, t he processing aid amounted to 1 0 25% of the price of raw hemp. Thanks to the processing aid, HempFlax and Dun Agro were able to offer growers a competitive price. 4 Due to the changing farming landscapes the supply of hemp straw is highly elastic. Farms have become larger and farmers more and more pr ofit seeking. Hemp faces severe competition from maize and wheat. Hemp, as well as corn and wheat, does not require substantial capital investment because the harvest is taken care of by external parties. In the case of hemp the processor is responsible f or the harvesting Corn and wheat growers can chose to invest in the required capital themselves or to hire wage workers to do the harvest. Considering the fact that the cost of hemp and alternative crops are rather similar, farmers can base their choice of crops grown mostly on the sales price 2 M. Berg (2013) and S. Van Rijs (2013) 3 D.J. Mellema (2013), A. Gjaltema (2013) and M. Reinders (2013) 4 Personal communication with Mellema (2013)

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42 function 5 Factors that determine profitability and the marginal cost function at the comparison between barley and hemp it is estimated that growers do not harvest themselves. According to de Wolf, van den Brink and Spruijt (2012) it is likel y that especially at large farms growers have invested in harvesting materials and take care of the wheat harvest themselves. This will reduce the marginal cost of growing wheat. Hemp is always being harvested by processors. Therefore, the marginal cost fu nction of hemp cannot be reduced the same way as the cost function of wheat. Hemp requires nitrogen to grow. It can absorb more fertilizer than wheat. T his can make a significant difference in the cost functions of wheat and hemp. Dependency on fertilizer can increase the marginal cost of hemp more than the marginal cost of wheat. On the other hand, hemp growers will benefit more from a negative price of organic fertilizer (de Wolf, van den Brink, & Spruijt, 2012) Especially i n the Netherlands the price of organic fertilizer can make a difference. Due to highly intensive livestock production and land scarcity the southern parts of the Netherlands ha ve a substantial organic fertilizer surplus. Hence, livestock farmers pay for m anure disposal. Depending on the supply, hemp farmers can profit from taking over manure 6 The negative price of organic fertilizer can decrease the marginal cost function of hemp more than the cost function of alternative crops. 5 Personal communication with G jaltema (2013) 6 Personal communication with Berg (2013)

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43 Also the price o choice. Because growers can rotate crops rather easily, farmers will only grow hemp when the price of hemp straw offered by processors makes it advantageous to grow the natural fiber crop. Consequently, the supply for the processors is very elastic, i.e., a slight in crease in the price of hemp straw shifts growers away from hemp cultivation. With the processing aid the processors were able to offer growers a hemp price more competiti ve with the price of grain. Nowadays, the processing aid has been taken away. Nevertheless, processors cannot lower the price of hemp straw because of its elastic supply. On top of that, the grain prices have increased significantly since 2011. One of the factors causing this increase in the prices of wheat in the north eastern part of the Netherlands is the competition with biomass cultivation of wheat for biomass plants. Euro pean subsidies on bioenergy and biofuels and the lack of subsidies on bio based materials like hemp distort the bio market and affect hemp production negatively. Figure 4 1 shows the development of the price of wheat and barley 7 from November 2010 until August 2013. In January 2012 the processing support for natural fiber s w as eliminated. As illustrated in Figure 4 1 the price of wheat increased more than thirty per cent since 2012. Currently, the price is decreasing again. Nevertheless, the price of wheat still 20 per cent higher than pre 2012 lev els. De Wolf, van den Brink, & Spruijt (2012) estimate that, without coupled subsidies, hemp can compete with barley in the Netherlands if the price of barley is 7 Price chang e is indicated in euros per ton of wheat cultivated in Groningen, the Netherlands; the area where hemp is cultivated as well

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44 hectare. straw. The decision to grow hemp or an alternative crop is dependent on the pri ce and the cost of the crops. One main determinant of the individual cost function is whether the grower has to hire external labor and capital to take care of the Also it depends on whether the price of organic fertilizer is positive or negative. Considering the fact that growers are profit seekers and that it is easy to switch to alternative crops, farmers chose to grow the crop that generates the most revenue. Hence, the supply of hemp straw is considered to be highly elastic. Demand S ide There is not a lot of room for price maneuvering on the supply side. On the demand side there seems to be a little bit more flexibility. The price of processed hemp is still dema nd elastic; clients tend to sort for substitutes when prices increase significantly. On top of that, hemp processors do not have a monopoly position. Even though there are only two processors in the Netherlands, in Europe they can still be considered compe titive profit seekers and price takers. Nevertheless, the market is less rigid due to mutual dependency and fixed contracts. Mutual dependency is a result of the relative infancy of the market. Applications for hemp products are still to be further discov ered and developed. Primary processors and further processors are developing new market s together with

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45 a mutual interest in maintaining the market. This is one factor that makes the demand side less elastic than the supply side. 8 On top of the mutual depen main customer is BMW. Characteristic of the automotive industry is that contacts are long term based. Commonly, production cycles take approximately seven years. This stabilizes the market demand. Consequently, HempFlax managed to pass on part of the burden of the elimination of the processing aid on to the customers by increasing the price by approximately 10%. Nevertheless, the proc essing aid was estimated to be 1 0 25% of the price of raw hemp. On top of that, the price of grain increase d forcing the processo rs to increase the price of hemp straw to maintain supply Therefore, it can be hypothesized that the greatest part of the burden falls on the processors. 9 Hypotheses After the theoretical framework around the elimination of support and developments in the hemp sector has been discussed, a set of hypotheses will be tested in Chapter 5 by using the multi level market model Hypothesis 1 states that the elimination of processing aid has no impact on the price of p rocessed hemp. Hypothesis 2 says that t he elimination of processing aid has no impact on the quantity of hemp processed. Hypothesis 3 is that t he elimination of processing aid has no impact on the p rice of hemp straw. Hypothesis 4 says t he elimination of p rocessing aid has no impact on the quantity of hemp straw supplied 8 Personal communication with Gjaltema ( 2013) 9 Ibid.

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46 Figure 4 1 Price of wheat Adaptation from Productschap Akkerbouw. (2013), Marktprijs: Groningen Tarwe Retrieved June 3, 2013, from http://www.productschapakkerbouw.nl/teelt/marktprijzen/marktprijs_details 150 170 190 210 230 250 270 Sep-10 Oct-10 Nov-10 30-11-2010 Dec-10 25-01-2011 Feb-11 08-03-2011 Apr-11 10-05-2011 Jun-11 30-08-2011 Oct-11 25-10-2011 Nov-11 06-12-2011 Jan-12 31-01-2012 Feb-12 13-03-2012 Apr-12 01-05-2012 May-12 12-06-2012 Aug-12 28-08-2012 Sep-12 16-10-2012 Nov-12 27-11-2012 Jan-13 29-01-2013 Feb-13 12-03-2013 Apr-13 07-05-2013 May-13 18-06-2013 Wheat Barley

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47 CHAPTER 5 TWO INPUT ONE PRODUCT MODEL In order to determine the effect of abolishing processing support on Dutch hemp processors and the Dutch hemp industry in general, a multi level market single output, two input model is con structed. (1987) approach. It examine s the effect of an exogenous (policy) shock on endogenous factors. In this research, the exogenous factor is the loss of payments and the endogenous factors are the input and output quantities and the prices of hemp straw and processed hemp Choice of the M odel Different s imulation models can be used to estimate the impacts of policy reforms. This section will explain the choice of the single output, two input model to calculate the effects of the elimination of hemp subsidies. Most commonly partial or computable general equilibrium (CGE) models are used to assess the impacts of policy changes. Partial equilibrium models model only direct effects assuming ceteris paribus. CG E models, in contrast, attempt to model the complete market. CG E models are, especially micro econom ically, more detailed. The drawback is that a substantial amount of data is required. Also the complexity of the model makes the interpreta tion of the results more difficult and sometimes less intuitively (Braverman, Hammer, & Gross 1987) Multi market models are a combination of partial equilibrium and CGE models. They are more elaborate than partial equilibrium models because multi market models also include indirect effects of policies through supply and demand responses.

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48 On the other hand, multi market models are not as complete as CG E models because external welfare changes are not considered in the analysis (Arulpragasam & Conway, 2003) Gohin and Moschini (2006) ton d the difference between partial equilibrium and CGE models in evaluating the effects of phasing out CAP policies. The researchers applied the different models to similar data and compared the results. The conclusion is that the market effects of phasing ou t subsidies are comparable across the models. The welfare effects, however, differ slightly. This research looks primarily into the market effects of the elimination of one specific CAP policy. The aim is to also assess the changes in prices and quantitie s of both demand and supply. Hence, a partial equilibrium model will not be sophisticated enough for this research. A CG E model, on the contrary, is considered to be too complex and too data demanding. It has been taken into account that Gohin and Moschini (2006) assert that different models show similar results when testing for the market effects of changes in policy. Therefore it has been decided that the intermediate solution of a multi market model with two inputs and one output will be used to estimat e the impact of the elimination of fiber subsidies. Assumptions The multi level market model is constructed under five assumptions (1) all hemp cultivated in the Netherlands for non feed products are processed at eith er HempF lax or Dun Agro (2) processors d o not differentiate between hemp straw Hence, there is homogeneous input for hemp st r a w in a market with many sellers ; (3) the output market is competitive

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49 As far as the input market concerns, the prices are fixed for all inputs other tha n hemp ; (4) producers maximize profits ; (5) the complete hemp subsidy is passed through to growers and can hence be represented as a percen tage of the price of hemp straw Another assumption of the model is that the processors are competitive and opt imizing agents. Risk and market imperfections are not reflected in the model. For the purpose of this research the percentages leaves and stems coming from the hemp plant are considered to be fixed. As a consequence processed hemp is, despite its different eventual applications, considered to be a one output product. Also there is solely one input ; hemp straw Both the grower and the processer are assumed to be profit seekers that attempt to maximize their profits. The processors profit function is : Max. Eq. ( 5 1 ) Equations The profit maximization function for the processor consist s of the revenue ( minus the cost of hemp straw ( ) and the cost of extracting ( c times the price of the cost P c ) Since profit is maximized and we are dealing with an optimizati on problem Lagrange mult ipliers come into the equation. Production function processors: Eq. ( 5 2 ) Factor prices processors: Eq. ( 5 3 ) Eq. ( 5 4 )

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50 Factor supplies processors: Eq. ( 5 5 ) Eq. ( 5 6 ) Product demand: Eq. ( 5 7 ) The elimination of direct payments to p rocessors affects the processing cost. As a consequence the supply curve of the processors shifts. The subsidy changes E q 5 2 to per ton of hemp and is considered to be an exogenous shock to the supply and demand model. Up until 2012 the supply curve includes When the subsidy is el iminated in 2012, the supply curve shifts back to a position determined by the market conditions. The function changes to In accordance with the assumptions E q 5 2 is linear homogeneous. This implies that the processors produce at the m inimum of their average cost function. The elasticities of Y with respect to X and c are equal to the factor shares ( YP y = XP x + cP c ). The changes as a consequence of the abolishing of the processors aid will be ton d Hence, the differen tials of Eqs. 5 2 through 5 4 are required. Eq. ( 5 8 ) Eq. ( 5 9 ) Eq. ( 5 10 )

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51 Eq. ( 5 11 ) Eq. ( 5 12 ) Eq. ( 5 13 ) The differential Eqs. 5 2 to 5 7 are simplified and converted into elasticity form: Eq. ( 5 14 ) Eq. ( 5 15 ) Eq. ( 5 16 ) Eq. ( 5 17 ) Eq. ( 5 18 ) Eq. ( 5 19 ) P rocessing subsidies are a percentage of the price of hemp straw Therefore it is assumed that the elimination directly affects the input function Eq. 5 18 The subsidy is represented by In order to measure the effect of the exogenous shock, all variables are divided by This r esult s in the following equations: Eq. ( 5 2 0 ) Eq. ( 5 2 1 )

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52 Eq. ( 5 2 2 ) Eq. ( 5 2 3 ) Eq. ( 5 2 4 ) Eq. ( 5 2 5 ) Solving this for the unknowns EY, EP c EP x Ec, EX and EP y gives the following solution illustrated in Table 5 1 More details about the deriva tions can be found in Appendix C Graphical A nalysis Payment C hanges This section will illustrate the effects of the changes in direct payments graphically. The elimination of financial support to processors affects the production function of hemp processors directly. The net costs of production do not change. However, the removed s upport makes the production relatively more expensive. Consequently, the supply function of the pr ocessors shifts back (Figure 5 1 ) This leads to a new equilibrium that reduces the quantity processed and increases the price of processing hemp. What the consequences are on different endogenous variables depends on the elasticities of supply and dema nd. The more elastic the demand, the greater the effect of th e elimination of the payments on the quantity processed. When the elasticities of supply and demand are equa l, the increase in price is equal on the supply and demand side. At the extremes, when the elasticity of supply is great and the elasticity of demand small the price of processed hemp will be affected whereas the price of raw hemp does not change significantly and vice versa (Gardner, 1987)

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53 T here is a loss in b oth consumer and producer surplus. The loss is represented in Figure 5 2 With the subsidy in place, the consumer surplus wa s represented by the triangle fei After the abolishing, the consumer surplus decreased to abi Similarly, the producer surplus shri nks from feh t o abg The rectangle dcef represents the amount the government does not have to pay out any longer. Bce is the deadweight loss triangle that is gained from switching for a stage with subsidy to a market equilibrium situation without governmen t support In other words, the price of both hemp straw and processed hemp increases and the quantity processed decreases. Assuming there are no ma rket failures, taxpayers gai n because money is saved by not paying out subsidies anymore. Data This section presents the quantitative data used throughout the research. The data is split up in two parts. First, the financial overview goes into the company data used. Second, the parameter values used are explained. Financial O verview According to th e hemp processors, the ratio hemp shives, fiber dust is 2:1:1. Table 5 2 and Table 5 3 give the price information of hemp in 2013. The tables illustrate that under current circumstances without processing subsidies no profit is left for processors. The pr ofit goes into offering farmers a competitive price. This used to be different in the past. Whereas the input and sales prices were lower, the subsidy gave some price leverage. To illustrate the contrast, Table 5 2 and Table 5 3 also show the pric es and re venue of hemp in 2005.

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54 Multi market models are generally non temporal and keep other price influencers like, for instance, inflation constant. Therefore, only t he 2013 price data is required to calculate the effect s of the elimination of subsidy. Parameter V alues The elasticities of supply and are assumed to be fairly elastic. According to both interviews with hemp farmers and hemp processors, farmers switch to different crops easily when the price of hemp straw drops. The product dem and is also estimated to be elastic. Nevertheless, it is less elastic than the elasticity of supply due to long term contracts on the demand side. Still, significant price changes will drift away consumers making the demand elastic With constant returns t o scale, t he Allen elasticity of substitution is assumed to be equal to one (Allen, 1938) The factor shares and are estimated based on the information provided by Hempflax. Because of the assumption of linear homogeneity, Per ton processed hemp the 2013 cost ( c straw ( X ) and are estimated to be 0.46 and 0.54 respectively. Table 5 4 gives a sch ematic overview of all parameter values chosen. Subsidy T wo input O ne product M odel R esults T he effect of an exogenous shock on the endogenous variables is shown in Table 5 6 Effect subsidy on endogenous variables According to Gjaltema (2013) 1 ton fiber amounts to ton hemp straw delivered. The 2013 cost of hemp straw (X) is est 80 per ton Although this is a post subsidy elimination price, it is 1 Personal communication

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55 equivalent to the last pre elimination price. This can be explained by the fact that hemp processors kept the ir price artificially above the market equilibrium price This model will estimate the extent to which the price will chang e assuming there are no market failures and processors will not keep prices artificially high. Hence, we can consider to be 22/1 80 = 0.1 2 In other words, the subsidy consisted of 1 2 % of the price of hemp straw and the results indicate how the equilibrium would be restored without market failures. With an of 0.1 2 the endogenous effect of the abolishing of the subsidy can be estimated using the formulas in Table 5 1. Table 5 6 Effect subsidy on endogenous variables show s the changes in the endogenous variables as a consequence of a one per cent change in subsidy provided. Since the subsidy is estimated to be 12 per cent of P X, Table C 1 indicate s the percentage change as a consequence of the complete elimination of processing aid. It turns out that elimination of the subsidy will increase the price of processed hemp by approximately 4 05 % and decrease the quantity by 1 2.15% This implies the price per kilogram of hemp fiber s will rise from 3 Figure 5 3 and Figure 5 4 g raphically illustrate what happens to the price and quantities of X and c respectively. T x represents the subsidy that is taken away. Consequently, the market equilibrium for X is restored. The price of X goes up whereas the quantity decreases. One of the indirect consequences of the elimination of subsidy is that the demand f or c shifts back. Hence, the quantit y as well as the price of c go es down.

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56 The price of hemp straw is estim ated to go up by 8 65 % and the quantity will decrease by 6 35 %. It should be noted that the price in increase is reflected in the demand curve of hemp straw. In other words, processors will face a price increase. However growers will face an in crease of T he price of hemp straw becomes more expensive for farmers because the subsidy is not included in the price anymore. On the other hand, hemp growers lose as well because the loss of the subsidy is depressing the supply price of hemp straw. Effectively, without market failures the hemp straw price should increase from 180 to 202 The quantity reduces from 1274 hectares to 11 80 hectares. This implies that the partial substitution effect is not as large as the effect of the elimination of the subsidy. Consequently, the decrease in X will not be substitut ed by c. Instead, the use of c will decline by 6.75 %. Sensiti vity A nalysis Because there is no exact data on elasticities of supply and demand for hemp available a sensitivity analysis is conducted to examine the potential error as a consequence of miscalculating elasticities. The range of elasticities chosen is again based on estimations about the supply and demand described in Chapter 5. 2 Table D 1 in Appendix D illustrates that when changing th e elasticities from ( )1 to ( ) 10 the effect a 1% change in subsidy ha s on the price of processed hemp ranges from 0. 07 to 0.49 In other words, the complete abolishing of the subsidy will lead to a price increase between 0. 79 % when and If and P Y increases by 5 89 %. The smaller the elasticity of demand, the lower the fluctuation of the price of processed hemp. 2 i .g. supply and demand elasticities of hemp are never assumed to be inelastic. Hence, the lowest elasticity values used are 1 and 1.

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57 Tables D 2 through D 6 in show the results of the sensitivity analysis of the other variables. It becomes clear that due to th e relatively low substitutability of X and c, is not a large determinant of fluctuations in P X T he price of X will increase the least when the elasticity of is the lowest. With and 0 P X increases with 10.91 per cent. When and P X increases with 2.46 per cent This implies that the supply price of P X decreases between 9.54 and 1.09 per cent. 3 P c increases slightly more when the elasticity of is greater. When the elasticity of becomes larger the price fluctuates less. With and P c de creases with 6 24 per cent. In contrast, when and P c decreases with 0 .8 4 per cent. The re is a positive relation between the decrease in the quantit ies of Y and c and the elasticities of supply and demand. When and Y decreases with 27 6 per cent and c decreases with 2 0 8 per cent. Due to the substitution effect the quantity of X decreases the most when is low. When and X decreases with 14 4 per cent. There is little to no effect on the quantities of Y, c and X when the elasticity of deman d is low. The price effect on Y is the smallest when the supply elasticities of X and c are small. For instance, when and Y decreases with 3.24 per cent. With the quantity change is c is estimated to be 3 It seems counterintuitive that when the elasticity of is high the price fl uctuation, P X, is the greatest. However, it should be noted we are talking about an increase in the demand price of hemp straw. Hence, processors prefer the elasticity to be as low as possible. After all, the higher the elasticity the more likely it is that processors have to increase the price of hemp straw in order to guarantee a stable supply.

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58 The effect on X is the smallest when the elasticities of supply are high. With both and and and the quantity X will decrease by 2.76 per cent. Hypotheses All of the h ypothes e s are all rejected The elimination of processing aid increases the price of processed hemp by 4.05%. The quantity processed will decrease by 12.15%. The demand price of hemp straw increases by 8.65%. Last, the quantity of hemp straw demanded is expected to decrease by 6.35%.

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59 Table 5 1 Effects of subsidy on endogenous variables Endogenous variables Exogenous variable Y c X Note: In accordance with Gardner ( 1987: 107), the entries show the effect of percentage changes in the exogenous variables on / or the elasticity / D = det X = D > 0 for < 0,

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60 Figure 5 1 Graphical illustration effect abolishing processing aid

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61 Figure 5 2 Consumer and producer surplus effects

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62 Table 5 2 Prices hemp straw Supply: Price hemp straw in euros per ton 2005 130 2013 180 Table 5 3 Turnover Demand: Price processed hemp per ton Ratio processed products in kilograms Price per kilogram in euros Total revenue in euros Revenue price of straw Turnover + subsidy Turnover cost (profit) ton 2005 500 shives 250 fiber 0.25 0.50 270 140 162 7 2013 500 shives 250 fiber 0.32 0.70 335 155 155 0 Table 5 4 Parameter values Parameter Value e c 5.00 e X 5.00 1.00 Y 3.00 k c 0.46 k X 0.54

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63 Table 5 5 Subsidy model results Table 5 6 Effect subsidy on endogenous variables 0.388 0.113 0.721 1.013 0.563 0.529 % 4.05 1.35 8.65 12.15 6.75 6.35

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64 Figure 5 3 Effect on X and Px

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65 Figure 5 4 Effect on c and Pc

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66 C HAPTER 6 CONCLUSION In the final chapter of this thesis the research will be summarized After the summary, the implications of t he research, the limitations and possibilities for further research and future perspectives will be discussed. Summary Although hemp has been c ultivated for centuries c ommercial cultivation of industrial hemp in the Netherlands has a relatively short history. After production start ed in 1996 and minimized in 2003 the commercial production only revived in 2005 This makes hemp a relatively new c rop at the agricultural market. Hemp is considered to be a valuable product because it is a green alternative to a wide variety of less sustainable crops and products. Nevertheless, hemp has to compete against alternative crops in a competitive agricultura l market. Therefore it is the question what the future perspectives are for hemp as a crop and hemp production in general in the Netherlands. This research analyzed the consequences of changes in natural fiber subsi dy structures under the CAP on the indus trial hemp industry in the Netherlands. It primarily focused on the impacts of the elimination of hemp processing aid in 2012. In order to analyze the effects on the price and quantities of hemp straw and processed hemp a multi level market two inputs, one product model was set up.

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67 Implications The finding s are in line with estimations of hemp processors Gjaltema ( 2013 ) and Mellema ( 2013) 1 and research conducted by De Bont et al. (2008). It is expected that due to the elimination of processing support the sales price of processed hemp increases. Furthermore, the quantities of hemp straw delivered and hemp processed will most likely decrease by substantial amounts. Our finding are not completely in line with the results of the Suijkerbuijk and Janszen (2006) research. In 2006, market acceptance seemed to be one of the greatest threats to the development of the hemp sector in the Netherlands M any of the potential thr has become more known as a prod uct in multiple applications, the market is expanding and market acceptance is growing. However, supply of hemp straw appears to be more of the issue these d ays. Because of the elimination of support and severe competition of other crops it has become more difficult for processors to offer farmers a competitive price. Hence, the greatest threat is the supply of the dependenc y on the essential input hemp straw. In line with the findings of Zijlstra et al. (2011) it appears that the small scale of the Dutch hemp industry also poses a threat to future development. The larger the market share, the more leverage processors have to cut in the cost of production, to invest in technological development, and to co determine the price of inputs. It was not only the question what the market effects of the elimination of processing aid are. Also the impacts on the welfare of processors, growers and others are examined qualitatively by means of interviews Because farmers can 1 Both personal communication

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68 change their crop rotations directly. The more easily farmers can substitute hemp for an alternative crop, the greater the impact will be on th e price of hemp straw. Whereas it is assumed that growers suffer little from the elimination of processing aid, retailers are expected to lose some profit. The main reason for this is the fact that retailers set up long term contracts with processors. Mo reover, in contrast with growers, it is considered to be less easy to switch to alternatives. The more easily retailers switch to substitutes, the smaller the increase in price of processed hemp will be. Processors are anticipated to be the largest loser s of the elimination of processing aid. Some of the burden will be passed on to retailers. Nevertheless, processers will lose by far the most. wheat remains high it becomes very difficult for processors to c ompete. Under current circumstances processors are left with zero profit. The magnitude of the consequences of the elimination of proc essing aid is dependent on the extent to which a change in the price affect the quantities supplied or demanded The mor e retailers are willing to invest in hemp products, the more of the burden of the elimination of the processing aid can be passed on to retailers. Also, like Zijlstra et al. (2011) concluded, the more growers are dependent on hemp as a crop the more flexi bility processors have in increasing the price of hemp straw. ing through of support.

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69 Limitations & F urther R esearch Like has been mentioned in Chapter 5 the model can be elaborated. Nevertheless that would require more data and time. One of the limitations of this model is that it does not directly account for price changes in alternative crops. This research does indic ate that especially the price of wheat is a determinant factor for the profitability of the hemp industry. In further research the cross price elasticities of hemp and wheat could be added to the model to account for this influencing factor. Additio nally, it should be noted that this model estimated the fluctuations in prices, quantities and welfare as a consequence of the elimination of processing aid. All other factors that might influence the price, quantity or welfare are not included in the mode l and considered ceteris paribus The model can be developed further by including factors like evolvement over time or technological improvements to the model. Furthermore, this model illustrated what the impact would be on the price and quanti ties of hemp assuming perfect market conditions. Market failures are not taken into consideration. Out of the interviews with the hemp processors it already became clear that the allocation of resources in the hemp industry is not completely efficient. Pro cessors have kept the prices of hemp straw artificially higher than the market equilibrium to prevent farmers from switching to alternative crops massively and to guarantee the stable supply of processed hemp. Consequently, the current price of hemp straw purposely differs from the price estimations of the model. It illustrates the difference between a perfect market situation and the position currently preferred by processors.

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70 Future P erspectives What the future of industrial hemp in the Netherlands wi ll look like depends on several factors. It has become clear that hemp processors in the Netherlands struggle to generate profits. The main factors causing the difficulties are infancy of the market, the current high price of alternative crops and the elim ination of subsidies. Processors attempt to lower the cost by focusing on new applications for hemp and reducing the processing waste. Also processors look at possibilities to lower the price of hemp straw by importing from Eastern European countries like for instance Romania. Processors can attempt to reduce the cost but is also remains a socio political question whether society should do something to help the Dutch hemp industry to overcome its stage of infancy and to preserve hemp cultivation and proc essing in the Netherlands. The main issue does not seem to be lack of the provision of subsidies but the unfair competition created by the introduction of subsidies. In line with De Wolf, van den Brink, & Spruijt (2012) this research concludes that the hem p industry suffers from high prices of maize and grains. It is very likely high prices are caused by subsidies on biofuels. In other words, subsidies for biofuels harm the bio product industry. It is unequivocal that the prospects for hemp in the Netherlan ds would look brighter with a policy framework that restores the balance between support for biofuels and bio products.

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71 This research illustrated that after the elimination of pr ocessing aid, it becomes rather difficult for processors to stay competitive at the market. Whether hemp will still grow on the fields in the north east of the Netherlands the next decades will depend on the determination and innovative mind of processors and the policy frameworks of both the Net herlands and the European Union.

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72 A PPENDIX A B REAKDOWN OF HEMP Figure A 1 Breakdown of hemp grown for fiber R eprinted by permission from Dempsey, J. (1975), Hemp. In Fibers Crops Gainesville: University of Florida (Page 82 Figure 3 )

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73 APPENDIX B : APPLICATIONS AND BENEFITS HEMP Figure B 1 Applications and benefits hemp. Reprinted by permission from Holmes, C. (2005), Summary Report for the European Union. York: IENICA (Page 54, Figure 3)

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74 APPENDIX C : DERIVATIONS TWO INPUT ONE PRODUCT MODEL with Lagrange Eq. ( C 1 ) First order conditions Eq. ( C 2 )

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75 given that Eq. ( C 3 ) Eq. ( C 2.4 ) Eq. ( C 2.5 ) Partial derivative of profit with respect to prices of input s c and X and output Y Subsidy percentage change

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76 Percentage changes 1 Eq. ( C 6 ) 1 Assuming linear homogeneity

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77 Eq. ( C 7 )

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78 Eq. ( C 8 ) Eq. ( C 9 ) Eq. ( C 10 )

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79 Eq. ( C 11 ) This results into the following matrix system of eq uations: =

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80 This can be expressed as is solved for the variables That generates a system of equations in which the variables X are solved as a function of parameters B and exogenous variables Z (Gardner, 1987) The results are as follow s : Table C 1 Effect of exogenous shock on endogenous variables Endogenous variables Exogenous variable Y c X Note: In accordance with Gardner ( 1987: 107), the entries show the effect of percentage changes in the exogenous variables on percentages changes in the / or the elasticity / D = det X = D > 0 for < 0,

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81 APPENDIX D : RESULTS SENSITIVITY ANALYSIS Table D 1 Sensiti vi ty analysis effect EP Y Y Elasticities of supply e c and e X Y = 1 Y = 2 Y = 3 Y = 5 Y = 8 Y = 10 e c = 1 e X = 5 0.45 0.34 0.27 0.20 0.14 0.12 e c = 2 e X = 5 0.45 0.36 0.30 0.23 0.17 0.14 e c = 3 e X = 5 0.45 0.37 0.32 0.25 0.18 0.16 e c = 5 e X = 5 0.45 0.39 0.34 0.27 0.21 0.18 e c = 8 e X = 5 0.45 0.39 0.35 0.29 0.23 0.20 e c = 10 e X = 5 0.45 0.40 0.36 0.29 0.23 0.21 e c = 5 e X = 1 0.27 0.20 0.16 0.11 0.08 0.07 e c = 5 e X = 2 0.36 0.29 0.24 0.18 0.13 0.11 e c = 5 e X = 3 0.41 0.33 0.28 0.22 0.16 0.14 e c = 5 e X = 5 0.45 0.39 0.34 0.27 0.21 0.18 e c = 5 e X = 8 0.48 0.42 0.38 0.31 0.25 0.22 e c = 5 e X = 10 0.49 0.44 0.39 0.33 0.26 0.23 Note: The numbers in bold indicate the estimated outcome based on the initial elasticities. The outcome multiplied by 12 gives the percentage change in the variable as a consequence of the complete subsidy elimination that amounts to 12% of the price of X

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82 Table D 2 Sensitivity analysis effect E P x Elasticity of demand Y Elasticities of supply e c and e X Y = 1 Y = 2 Y = 3 Y = 5 Y = 8 Y = 10 e c = 1 e X = 5 0.83 0.78 0.74 0.70 0.67 0.66 e c = 2 e X = 5 0.83 0.77 0.73 0.68 0.64 0.62 e c = 3 e X = 5 0.83 0.77 0.73 0.67 0.62 0.60 e c = 5 e X = 5 0.83 0.77 0.72 0.65 0.59 0.56 e c = 8 e X = 5 0.83 0.77 0.72 0.64 0.57 0.54 e c = 10 e X = 5 0.83 0.77 0.71 0.64 0.56 0.52 e c = 5 e X = 1 0.50 0.40 0.34 0.27 0.22 0.21 e c = 5 e X = 2 0.67 0.57 0.51 0.43 0.37 0.34 e c = 5 e X = 3 0.75 0.67 0.61 0.53 0.46 0.44 e c = 5 e X = 5 0.83 0.77 0.72 0.65 0.59 0.56 e c = 5 e X = 8 0.89 0.84 0.81 0.75 0.70 0.67 e c = 5 e X = 10 0.91 0.87 0.84 0.79 0.74 0.72 Note: The numbers in bold indicate the estimated outcome based on the initial elasticities. The outcome multiplied by 12 gives the percentage change in the variable as a consequence of the complete subsidy elimination that amounts to 12% of the price of X

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83 Table D 3 Sensitivity analysis effect EPc Elasticity of demand Y Elasticities of supply e c and e X Y = 1 Y = 2 Y = 3 Y = 5 Y = 8 Y = 10 e c = 1 e X = 5 0 0.17 0 27 0 39 0 49 0 52 e c = 2 e X = 5 0 0 12 0 20 0 30 0 39 0 42 e c = 3 e X = 5 0 0 09 0 16 0 25 0 32 0 36 e c = 5 e X = 5 0 0 06 0 11 0 18 0 24 0 27 e c = 8 e X = 5 0 0 04 0 08 0 13 0 18 0 20 e c = 10 e X = 5 0 0 04 0 06 0 11 0 15 0 17 e c = 5 e X = 1 0 0 03 0 05 0 08 0 09 0 10 e c = 5 e X = 2 0 0 05 0 08 0 12 0 15 0 16 e c = 5 e X = 3 0 0 06 0 09 0 15 0 19 0 21 e c = 5 e X = 5 0 0 06 0 11 0 18 0 24 0 27 e c = 5 e X = 8 0 0 07 0 13 0 21 0 29 0 32 e c = 5 e X = 10 0 0 07 0 13 0 22 0 30 0 35 Note: The numbers in bold indicate the estimated outcome based on the initial elasticities. The outcome multiplied by 1 2 gives the percentage change in the variable as a consequence of the complete subsidy elimination that amount s to 1 2 % of the price of X

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84 Table D 4 Sensiti vity analysis effect EY Elasticity of demand Y Elasticities of supply e c and e X Y = 1 Y = 2 Y = 3 Y = 5 Y = 8 Y = 10 e c = 1 e X = 5 0.45 0.68 0.82 0.99 1.11 1.16 e c = 2 e X = 5 0.45 0.72 0.91 1.14 1.33 1.41 e c = 3 e X = 5 0.45 0.75 0.96 1.24 1.48 1.58 e c = 5 e X = 5 0.45 0.77 1.01 1.35 1.66 1.80 e c = 8 e X = 5 0.45 0.79 1.05 1.44 1.81 1.98 e c = 10 e X = 5 0.45 0.80 1.07 1.47 1.87 2.06 e c = 5 e X = 1 0.27 0.40 0.48 0.57 0.63 0.66 e c = 5 e X = 2 0.36 0.57 0.71 0.89 1.03 1.09 e c = 5 e X = 3 0.405 0.67 0.85 1.10 1.31 1.39 e c = 5 e X = 5 0.45 0.77 1.01 1.35 1.66 1.80 e c = 5 e X = 8 0.48 0.84 1.13 1.55 1.96 2.15 e c = 5 e X = 10 0.49 0.87 1.18 1.63 2.09 2.30 Note: The numbers in bold indicate the estimated outcome based on the initial elasticities. The outcome multiplied by 1 2 gives the percentage change in the variable as a consequence of the complete subsidy elimination that amount to 1 2 % of the price of X

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85 Table D 5 Sensitivity analysis effect Ec Elasticity of demand Y Elasticities of supply e c and e X Y = 1 Y = 2 Y = 3 Y = 5 Y = 8 Y = 10 e c = 1 e X = 5 0 0.17 0.27 0.39 0.49 0.52 e c = 2 e X = 5 0 0.24 0.40 0.61 0.78 0.85 e c = 3 e X = 5 0 0.28 0.48 0.74 0.97 1.07 e c = 5 e X = 5 0 0.32 0.56 0.90 1.21 1.35 e c = 8 e X = 5 0 0.35 0.62 1.02 1.41 1.59 e c = 10 e X = 5 0 0.36 0.65 1.07 1.49 1.68 e c = 5 e X = 1 0 0.17 0.27 0.38 0.46 0.49 e c = 5 e X = 2 0 0.24 0.40 0.59 0.75 0.82 e c = 5 e X = 3 0 0.28 0.47 0.73 0.95 1.05 e c = 5 e X = 5 0 0.32 0.56 0.90 1.21 1.35 e c = 5 e X = 8 0 0.35 0.63 1.03 1.43 1.61 e c = 5 e X = 10 0 0.36 0.65 1.09 1.52 1.73 Note: The numbers in bold indicate the estimated outcome based on the initial elasticities. The outcome multiplied by 12 gives the percentage change in the variable as a consequence of the complete subsidy elimination that amounts to 12% of the price of X

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86 Table D 6 Sensitivity analysis effect EX Elasticity of demand Y Elasticities of supply e c and e X Y = 1 Y = 2 Y = 3 Y = 5 Y = 8 Y = 10 e c = 1 e X = 5 0,50 0,73 0,87 1,03 1,15 1,20 e c = 2 e X = 5 0,39 0,58 0,72 0,88 1,02 1,07 e c = 3 e X = 5 0,33 0,51 0,63 0,79 0,93 0,99 e c = 5 e X = 5 0,28 0,42 0,53 0,68 0,82 0,88 e c = 8 e X = 5 0,24 0,36 0,46 0,60 0,73 0,79 e c = 10 e X = 5 0,23 0,34 0,43 0,56 0,69 0,75 e c = 5 e X = 1 0,50 0,60 0,66 0,73 0,78 0,79 e c = 5 e X = 2 0,39 0,52 0,60 0,71 0,79 0,83 e c = 5 e X = 3 0,33 0,47 0,57 0,69 0,80 0,85 e c = 5 e X = 5 0,28 0,42 0,53 0,68 0,82 0,88 e c = 5 e X = 8 0,24 0,39 0,50 0,67 0,83 0,91 e c = 5 e X = 10 0,23 0,37 0,49 0,66 0,84 0,92 Note: The numbers in bold indicate the estimated outcome based on the initial elasticities. The outcome multiplied by 12 gives the percentage change in the variable as a consequence of the complete subsidy elimination that amounts to 12% of t he price of X

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87 LIST OF REFERENCES Allen, R. (1938), Mathematical Analysis for Economists. London: Macmillen and co. Amun Laate, E. (2012, June 29) Industrial Hemp Production in Canada. Retrieved March 3, 2013, from Alberta Agriculture and Rural Development: http://www1.agric.gov.ab.ca/$department/deptdocs.nsf/all/econ9631 Anderson, K., & Martin, W. (2009) The impact of distortions in food processing on agricultural NRAs. In Distortions to Agricultural Incentives in Asia (451 452). Washington, D.C.: The World Bank. Arulpragasam, J., & Conway, P. (2003) Partial Equilibrium Multi Market Analysis. In F. Bourguigon, & L. Pereira da Silva, The Impact of Economic Policies on Poverty and Incom e Distribution: Evaluation Techniques and Tools (12.1 12.16). Washington DC: Copublication of the World Bank and Oxford University Press. Beerepoot, L. (2003) Haalbaarheidsstudie vezelhennep voor textieltoepassing. Wageningen: Beerepoot Consultancy. Brave rman, A., Hammer, J., & Gross, A. (1987) Multimarket analysis of agricultural price policies in an operational context. World Bank Economic Review, 1 ( 337 356 ) Carus, M., Karst, S., & Kauffmann, A. (2013) The European Hemp Industry: Cultivation, process ing and applications for fiber s, shivs and seeds. European Industrial Hemp Association. CBS. (2013, February 14) Landbouw; gewassen, dieren en grondgebruik naar regio Retrieved March 18, 2013, from Centraal Bureau voor de Statistiek: www.cbs.nl de Bont, C., Blokland, P., Prins, H., Roza, P., & Smit, A. (2007) Zetmeelaardappelen en herziening EU beleid. Den Haag: LEI. de Bont, C., Jager, J., & Janssens, S. (2008) Vlas en vezelhennep en herziening van het EU beleid. Wageningen: LEI. de Wolf, P., van den B rink, L., & Spruijt, J. (2012) Inkomensvergelijking vezelgewassen versus graan. Wageningen: Wageningen UR. DeMeijer, E. v. (1992) Characterization of Cannabis Axxessions with Regard to Cannabinoid Content and Relation to Other Plant Characters. Euphytica, 62 (3) ( 187 200 ) Dempsey, J. (1975) Hemp. In Fibers Crops (46 89). Gainesville: University of Florida.

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88 Dienst Regelingen. (2013) DR Loket Retrieved July 4, 2013, from Hennep: http://www.hetlnvloket.nl/onderwerpen/bedrijfstoeslag/dossiers/doss ier/uitbetal en toeslagrechten/hennep Dienst Regelingen. (2013) Publicatie subsidiegegevens landbouw en visserij. Retrieved May 21, 2013, from http://www.drloket.nl/onderwerpen/gemeenschappelijk landbouwbeleid/dossiers/dossier/publicatie subsidiegegevens l andbouw en visserij European Commission Agriculture and Rural Development. (2009, February 26) European Commision: Hemp and Flax, AGRI C5. Retrieved March 18, 2013, from European Industrial Hemp Association: http://eiha.org/attach/553/09 02_C1_Flax_hemp_p resentation_26_February_2009_circa.pdf Gardner, B. (1987) The Economics of Agricultural Policy. New York: Macmillan Publishing Company. G ohin, A., & Moschini, G. (2006), Evaluating the market and welfare impacts of agricultural policies in developed count ries: Comparison of partial and general equilibrium measures. Review of Agricultural Economics, 28 (2) ( 195 211 ) Haars, A. (2012, June 23) Groningers bouwen huis van hennep. Retrieved March 18, 2013, from BNR: http://www.bnr.nl/meernieuws/755330 1207/gron ingers bouwen huis van hennep Hempflax. (2005) De Nederlandse Vezelhennepsector. HempFlax (2013) Retrieved July 24, 2013, from www.hempflax.com Holmes, C. (2005), Summary Report for the European Union. York: IENICA. Hoofdproductschap Akkerbouw. (2011) Steunregeling verwerking vlas en hennpe & steunregeling productie zaaizaad van vezelvlas. Karus, M. (February 2005) Europische Hanfwirtschaft 2001 bis 2004: Anbau, Rohstoffe, Produkte und Trends. European Industrial Hemp Association. Luginbuhl, A. (2001) Industrial hemp (Cannabis sativa L): The geography of a controversial plant. Journal of California Geographical Society, 41 ( 1 14 ) Oliver, A., & Howard, J. (April 1999) Industrial Hemp Fact Sheet. Kamloops, Canada: British Columbia Ministry of Ag riculture and Food. Piotrowski, S., & Carus, M. (2001) Possible support instruments for industrial hemp in the framework of the Common Agricultural Policy (CAP). Hrth: nova Institut.

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89 Productschap Akkerbouw. (2013) Marktprijs: Groningen Tarwe Retrieve d June 3, 2013, from http://www.productschapakkerbouw.nl/teelt/marktprijzen/marktprijs_details Ranalli, P., & Venturi, G. (2004) Hemp as raw material for industrial applications. Euphytica, 140 ( 1 6 ) Randall Fortenbery, T., & Bennett, M. (2004) Opportun ities for Commercial Hemp Production. Review of Agricultural Economics, 26 (1) ( 97 117 ) Struik, P., Amaducci, S., Bullard, M., Stutterheim, N., Veturi, G., & Cromack, H. (2000) Agronomy of fiber hemp (Cannabis sative L.) in Europe. Industrial Crops and Pr oducts, 11 ( 107 118 ) Suijker buijk, W., & Janszen, F. (2006), Haalbaarheidsonderzoek verwerking hennep in de Veenkolonin. Wezep: New Engine. Takeshima, H., & Lim Lee, H. (2012) Agricultural inputs subsidy and their developmental impact: Conventional wisdom. Washington, DC.: International Food Policy Research Insitute. Take shima, H., & Lim Lee, H. (2012), Exit strategies for and potential alternatives to agricultural subsidy programs. Washington, DC: International Food Policy Research Institute. U.S. D epartment of Agriculture. (2000) Industrial Hemp in the United States: Status and Market Potential. Washington: USDA. Vantreese, V. (1998) Industrial Hemp: Global Operations, Local Implications. Department of Agricultural Economics, University of Kentuck y. Vantreese, V. (2002), Hemp Support: Evolution in EU Regulation. Journal of Industrial Hemp, 7 (2) ( 17 31 ) Zijlstra, J., de Wolf, P., Prins, H., Doornewaard, G., Smit, A., Daatselaar, C., van Cooten, W. (2011) Meer groei dan vergroening. Wageningen: Wag eningen UR.

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90 BIOGRAPHICAL SKET CH Sandra Ronde is born in Canada and raised in the Netherlands. She obtained her degrees under the Atlantis Dual Degree Program in Agricultural Economics and Rural Development. Due to the high mobility of the Atlantis Program students get to opportunity to obtain theoretical as well as practical knowledge about agriculture and rural development on both sides of the Atlantic Ocean Sandra pursued the first year of her Master Degree at Ghent University in Belgium and Humboldt University in Berlin Germany The second year Sandra studied at the University of Florida in the United States of America. The European universities award the International Master of Science in Rural Development. The Master of Science of Food and Resource Economics is obtained at the University of Florida. Prior to her Master program Sandra obtained a Bachelor of Arts Degree in Liberal Arts and Science at Un iversity College Roosevelt in Middel burg, the Netherlands. For her b achelor Sandra specialized in e conomics, l aw, p olitical s cience and s tatistics. Sandra graduated c um Laude. After her studies, Sandra hopes to u se the knowledge obtained with both her undergraduate and graduate studies to make a meaningful contribution to society.


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