The Role of the Common Agricultural Policy in Enhancing Farm Income: A Dynamic Panel Analysis Accounting for Farm Size in Italy

As a multi-objective policy, the EU Common Agricultural Policy continues to secure significant income support for farmers as one of the nine specific objectives. We estimate the income transfer efficiency of a broad set of pivotal policy measures, focusing on the effects of farm structure on income transfer efficiency. We use dynamic modelling, based on a micro-data panel of Italian farms for the period 2008–2014, allowing for endogeneity, simultaneity bias, and omitted variables. In line with previous studies and economic expectations, we find that decoupled direct payments provide the highest contribution to agricultural incomes, followed by agri-environmental payments and on-farm investment subsidies. Coupled payments have no significant impacts on farmers’ income. Generally, for all analysed Common Agricultural Policy measures, large farms benefit from greater transfer efficiency levels compared with medium and small farms. These differences among instruments and across farms suggest that policy-participation costs may play a pivotal role, together with the economic structure of farms, in determining the income transfer efficiency of CAP policies.     

Farm technical and environmental efficiency and subsidy redistribution in Ireland: A simulation approach of possible performance and equity effects

We investigate the relationship between EU Common Agricultural Policy environmental payments, and dairy and beef farm level competitiveness and environmental performance. We use an Irish panel of farm level financial data for the years 2000–2017 and apply stochastic frontier analysis. Our estimates identify a positive relationship between technical efficiency and the Green, Low-Carbon, Agri-Environment Scheme for dairy farms, in contrast with the negative relation identified for previous payments of this kind such as the Rural Environment Protection Scheme for both beef and dairy. We then simulate increases in the first type of environmental payments financed through reductions in decoupled payments. We use alternative scenarios for payment redistribution such as flat allocation, allocation to farms with low stocking rates or proportional reallocation of payments. We find that under the second scenario, marginal environmental gains can potentially be achieved for dairy farms. For beef farms, the proportional allocation performs best regarding environmental gains. We also find that under this scenario, the impacts on income inequality can be smoothed for both farm types.     

Brexit: How Will UK Agriculture Fare?

There is little doubt that Brexit would have significant implications for UK agriculture, a sector with strong trade links to the EU and strong reliance on CAP income support. This article reports preliminary results from employing a Computable General Equilibrium Model, a Partial Equilibrium Model and Farm Level Models to explore selected trade and domestic policy scenarios post‐Brexit. These allow for the estimation of changes in producer prices, production and farm incomes against a baseline scenario of continued EU membership. Under a Free Trade Agreement with the EU, agricultural impacts are relatively modest. By contrast, unilateral removal of import tariffs has significant negative impacts on prices, production and incomes. Adoption of the EU's WTO tariff schedule for all imports favours net importers (e.g. dairy) and harms net exporters (e.g. sheep). Given the strong dependence of most UK farms on direct payments, their removal worsens negative impacts of new trade arrangements and offsets positive impacts. Impacts vary across different types and sizes of farm, but also regionally. However, the period of adjustment to new trade and domestic policy conditions may prove very challenging for a large number of farm businesses.     

Farms’ technical inefficiencies in the presence of government programs*

We focus on determining the impacts of government programs on farms’ technical inefficiency levels. We use Kumbhakar's stochastic frontier model that accounts for both production risks and risk preferences. Our theoretical framework shows that decoupled government transfers are likely to increase (decrease) DARA (IARA) farmers’ production inefficiencies if variable inputs are risk decreasing. However, the impacts of decoupled payments cannot be anticipated if variable inputs are risk increasing. We use farm‐level data collected in Kansas to illustrate the model.     

Public support effect on natural disaster management: A case study of ice storms in forests in Slovenia

In the last decade Slovenia has experienced more frequent natural disasters in forests. The most severe and widespread one that affected Slovenian forests, which cover more than a half of Slovenian territory, was a large-scale ice storm in early February 2014. This study aims to investigate the effect of the public support on the recovery of forest farms affected by the 2014 ice storm. Analyses focus particularly on the ability of Slovenian forest farms’ income recovery in a short-time period. The economic resilience of forest farms in the absence of forest disaster payments due to the absence of legal certainty for disaster aid in 2014 and 2015 provides an interesting framework for identifying the income effect of Common Agricultural Policy (CAP) payments. The Farm Accountancy Data Network has been used with applied statistical and regression methods to estimate the public support effect on selected woodland area size samples. Results suggest a positive effect of CAP payments on farm income recovery. The magnitude of the effect is high and significant for the less favoured area and disaster payments that were given for farm production loss in the 2013 drought. Although the magnitude of the effect is weak, investment payments show a significant positive effect on farm income recovery for all studied forest farm samples.     

Setting Climate Action as the Priority for the Common Agricultural Policy: A Simulation Experiment

We quantitatively assess the impacts of re-allocating budgetary resources within Pillar 1 of the EU's Common Agricultural Policy (CAP) from direct income support to a direct greenhouse gas (GHG) reduction subsidy for EU farmers. The analysis is motivated by the discussion on the future CAP, with calls for both an increased ambition on climate action from the agricultural sector and for a more incentive-based delivery system of direct payments under strict budgetary restrictions. By conducting a simulation experiment with an agricultural partial equilibrium model (CAPRI), we are able to factor in farmers’ supply and technology-adjusting responses to the policy change and to estimate the potential uptake of the GHG-reduction subsidy in EU regions. We find that a budget-neutral re-allocation of financial resources towards subsidised emission savings can reduce EU agricultural non-CO₂ emissions by 21% by 2030, compared to a business-as-usual baseline. Two-thirds of the emission savings are due to changes in production levels and composition, implying that a significant part of the achieved GHG reduction is offset globally by emission leakage. At the aggregated level, the emission-saving subsidy and increased producer prices compensate farmers for the foregone direct income support, but differences in regional impacts indicate accelerated structural change and heterogeneous income effects in the farm population. We conclude that the assumed regional budget-neutrality condition introduces inefficiencies in the incentive system, and the full potential of the EU farming sector for GHG emissions reduction is not reached, leaving ample room for the design of more efficient agricultural policies for climate action.     

Young farmers’ support under the Common Agricultural Policy and sustainability of rural regions: Evidence from Lithuania

The present study examines the influence of young farmers’ support system including both direct payments for young farmers and rural development measures initiatives under the Common Agricultural Policy (CAP) on the sustainability of rural regions. The intentions and decisions taken by young farmers in Lithuania are analysed within the rural sustainability concept. The empirical analysis relies on the questionnaire survey. In order to disentangle the possible effects of the CAP support on the farming sustainability (as it is perceived by the young farmers), we consider payments for farm establishment and expansion along with support for advisory services. The results show that young farmers’ support system under the CAP has the strongest perceived effect on income support in Lithuania without significant differences across different groups of farmers. The effect on investments is significantly lower for crop farms if opposed to the other farming types. Still, the results also indicate that environmental awareness of Lithuanian farmers is rather low as the demand for such advisory services appeared to be relatively low. The relatively high demand for advisory services on the business plan preparation suggests low levels of business administration and marketing skills among the young farmers, which indicates the need for development of the social dimension.     

Assessing CAP Reform: Sensitivity of Modelling Decoupled Policies

The European Union reformed farm policy in June 2003 towards the decoupling of farm income support instruments. Available impact studies find that this reform reduces production incentives substantially for beef and to a lesser extent for arable crops. However, these studies assume that the previous reform, under Agenda 2000, already decoupled arable crop direct payments to a considerable extent, while beef premiums were linked more closely to production. Our main objective in this paper is to test the sensitivity of these results to this questionable modelling of Agenda 2000 direct payments, which neglects eligibility rules and land market imperfections. Our analysis reveals that the effects of the reform on both arable crop and beef production are always negative, however the Agenda 2000 direct payments are modelled. On the other hand, we show that, when the eligibility rules and land market imperfections are acknowledged, the production reducing effects may be much larger for arable crops than for beef. Policy implications of these results are noted.     

Passive farming and land development: A real options approach

The EU's farmers are no longer required to produce commodities to receive direct payments as long as they keep their land in good condition. Some believe this is bad for development because it encourages passive farming. We evaluate, using a real options approach, the implications of decoupled payments for the desirability and optimal timing of agricultural land development when considering sunk investment costs and uncertain future returns. We find that decoupled payments accelerate development while passive farming increases, by adding managerial flexibility, the value associated with land. We then use the Nash bargaining solution to identify the rental share to be paid for leasing land. We show that a deal for the lease of land can always be reached, but that the facility to use passive farming as an outside option allows landowners to extract policy rents, thereby undermining the potential for the Basic Payment Scheme to support tenant farmers’ incomes.     

Welfare implications of reduced government subsidies to farm families: accounting for fringe benefits

In the past three decades, farm families have relied on government payments and off‐farm income to reduce income risk and increase total household income. Studies have shown that, as the income effect dominates, government payments tend to reduce off‐farm labor of farm operators and spouses. But that may not be true if one accounts for fringe benefits associated with off‐farm employment. Additionally, with looming budget deficits and the possibility of a reduction in decoupled government payments, farm families may be facing an altered economic environment. Our study addresses this issue by examining the links between government farm program payments and the ever‐important role of fringe benefits in the off‐farm employment of farm couples. Results from farm‐level data actually show that the marginal effect of government payments on hours worked off‐farm will decrease in magnitude when accounting for fringe benefits, ceteris paribus. These results support the notion that farm households’ welfare loss stemming from reduced decoupled payments may be overstated when models exclude fringe benefits from the estimation of off‐farm labor supply.     

The Impact of Direct Income Transfers of CAP on Greek Olive Farms’ Performance: Using a Non‐Monotonic Inefficiency Effects Model

We analyse the impacts of direct income transfers on the technical efficiency of Greek olive farms. We use a production frontier function and a non‐monotonic inefficiency effects model, which incorporates the influences of exogenous variables (subsidies, farm characteristics, etc.) on technical efficiency. The model is applied to 1995–2004 FADN data. The results show that direct transfers of the CAP had a negative and monotonic effect on technical efficiency, whereas the degree of specialisation had a non‐monotonic effect on technical efficiency.     

SOME FEATURES OF FARM INCOME AND STRUCTURE VARIATIONS IN REGIONS OF THE UNITED KINGDOM

Farm income trends and developments in farm structure have varied within the UK in the last decade. While Wales and Northern Ireland have similarities in form structure, agricultural production has risen to a much smaller extent, and farmers have suffered more severe net income reductions, in Scotland and Northern Ireland than in England and Wales. The net incomes of Cropping farms rose faster and, in England, have remained much higher than those of Dairy or Livestock farms. Large numbers of small farm businesses depend on beef cattle and sheep production and have limited development prospects. As most of their occupiers are unlikely to find other employment, structural problems will persist and policy adjustments are suggested to enable agriculture to contribute more to the economy in remote and depressed localities.     

Examining the relationship between farm size and productive efficiency: a Bayesian directional distance function approach

Achieving sustainable food security and increased farm income will depend on how efficient production systems are in converting available inputs to produce outputs. Using data from Malawi, we estimate a Bayesian directional technology distance function to examine the relationship between farm size and technical efficiency. Our results support the existence of an inverse relationship between farm size and productive efficiency, where small farms are more efficient than large farms. On average, farms exhibit inefficiency levels of 60%, suggesting that productivity could be improved substantially. Improving productive efficiency and food security will require farms to operate in ways where the size of cultivated area is matched by nonland production inputs such as labor, fertilizer, and improved seeds. The results highlight the need for policies that could incentivize farmers to adopt productivity‐enhancing technologies and, where possible, to allocate excess land to lease markets.     

Farm Type Effects of an EU‐wide Direct Payment Harmonisation

In this study, we analyse how three scenarios involving different levels of harmonisation of common agricultural policy (CAP) decoupled payments in the EU affect the distribution of farm income across regions and farm types. We use the farm type extension of the common agricultural policy impact (CAPRI) model, which captures farm heterogeneity across the EU. The first scenario (NUTS1) assumes uniform per‐hectare payments at the NUTS1 level. The second scenario (MS‐CONV) equalises the per‐hectare rates inside each Member State (MS) and partially harmonises the single payment scheme (SPS) across MS in line with the 2011 Commission proposal. The third scenario simulates a uniform per‐hectare payment at the EU level. Depending on the implementation of the SPS, the NUTS1 flat rate induces a substantial redistribution of payments across farm types and NUTS2 regions, particularly in regions that apply the historical SPS. The MS‐CONV and EU flat‐rate schemes have more significant impacts at the EU‐wide level. In the EU‐15, almost all farms lose payments from MS‐CONV and EU‐wide flat rates, whereas in the EU‐10, almost all farm types gain from these scenarios. Our conservative estimates indicate that the flat‐rate payments could redistribute up to €8.5 billion. Lower land rental costs partially offset the losses of farm income in the EU‐15 from payment redistribution. Land rents drop for all flat‐rate scenarios across most sectors and farm sizes in the EU‐15. In the less productive new MS, the landowners’ rental income is largely unaffected by the introduction of the flat rate.     

The Growing Heterogeneity in the Farm Sector and Its Implications*

The farm sector has moved from one that was very homogeneous to one with significant differences in size and/or orientation. The decline in the number of “average‐sized” farm and the growth in the number of large farms are due primarily to technological innovations that push operations producing commodities to grow as a means of capturing economies of size. The increase in the relative number of small farms is also due partially to technical advances that allow for the production of food goods with the desired quality attributes to be delivered to the appropriate market. This market is continually being differentiated due to demographic and income shifts. The growing heterogeneity in farm structure complicates the assessment and design of farm policy. The social policy objective of improving the livelihood of farmers and their families could be achieved through farm support and extension programs when the sector was homogeneous. The policy objective has shifted toward improving the competitiveness of the sector, but for which of its components? The trend toward greater heterogeneity is likely to continue and thus so will the internal and external support for any policies targeted toward the farm sector.     

Impact of CAP Subsidies on Technical Efficiency of Crop Farms in Germany,the Netherlands and Sweden

This paper analyses the impacts of CAP reforms, particularly subsidies on technical efficiency of crop farms. An output distance function is employed and estimated together with an inefficiency effects model to capture the effects of CAP subsidies and farmer characteristics on farm efficiency. The model is applied to FADN data (period 1995–2004) of crop farms in Germany, the Netherlands and Sweden. The study shows that the 10‐year average technical efficiency is 64% in Germany, 76% in the Netherlands and 71% in Sweden. The average annual changes in technical efficiency are 0.1%, 0.4% and 2.3%, respectively. The share of crop subsidies in total subsidies has a negative impact on technical efficiency in Germany but a positive impact in Sweden, although insignificant in the Netherlands. The share of total subsidies in total farm revenues has negative impacts on technical efficiency in all three countries, consistent with income and insurance effects. Positive (negative) change in technical efficiency is mainly attributable to farm size (degree of specialisation) in Germany, and degree of specialisation (degree of subsidy dependence) in the Netherlands and Sweden.     

Decoupling Direct Payments and the Dynamics of Decisions under Price Risk in Cattle Farms

The impact of decoupling direct payments from production on producers' decisions, taking account of price uncertainty and risk aversion, is analysed through a multi‐period mathematical programming model. This model is applied to beef cattle farms in two French regions: Limousin and Pays de la Loire. The technical coefficients are represented by an engineering production function estimated for both regions. The behavioural parameters have been obtained through a survey and model calibration. Policy changes have been modelled through different simulation scenarios relating to the decoupling of direct payments. Model results show that decoupling policies produce a more homogenous response from different types of farmers. The share of cattle activities on farms decreases and the production techniques become less intensive.     

How Decoupled are Decoupled Payments? The Evidence from Ireland

This article explores the production effects of the EU's system of decoupled payments and the implications for WTO negotiations. We compare survey data on Irish farmers' production plans post decoupling to the optimal outputs predicted by a farm-level profit maximisation model. The results show that, post decoupling, a significant number of farmers plan to use their decoupled payments to continue or expand economically non-viable production. An econometric analysis reveals that the decision to maintain or expand production levels post decoupling is not significantly influenced by current or future projected profitability levels. The analysis suggests likely widespread cross subsidisation of unprofitable production post decoupling but that aggregate production is still likely to decline relative to the traditional coupled, but production-limiting, blue box payments. If the EU wants to claim in the current WTO negotiations that decoupled payments amount to green box support, then the argument must be made that the payments have no, or at most minimal, trade distorting effects or effects on production. If it becomes apparent to members of the WTO that European farmers are using their decoupled income to subsidise market loss production, then the green boxing of the EU's decoupled payment scheme may come up for debate at the negotiations.     

Analysing Farm‐specific Payments for Norway using the Agrispace Model

Norway maintains a complex system of activity or type specific coupled payments which account for a large share of farm income. Most of the payment rates are negatively related to farm size and are higher in remote areas compared to central regions. We present and use a newly developed recursive‐dynamic multi‐commodity model (Agrispace) with CES production functions depicting regional farm clusters derived from the full farm population. Using this model, we simulate impacts of current and alternative subsidy policies on production, prices, input use, income and farm structural change. Mapping cluster results to each farm along with behavioural rules allows estimation of individual profits and farm exits. Our results indicate that, in the short run, the current policy regime seems to support the policy objective of maintaining a variety of farms in all parts of Norway. In the long run, farm structural change is less affected by a policy reform that leaves total support levels unchanged.     

Impacts of Decoupled Agricultural Support on Farm Structure,Biodiversity and Landscape Mosaic: Some EU Results

The decoupling of direct payments from production represents a substantial reform of the Common Agricultural Policy (CAP). Farmers are no longer required to produce commodities to be entitled to support but only to keep land in Good Environmental and Agricultural Condition. If output declines as a result, there is concern that landscape services produced jointly with commodities will also decline. The aim of this paper is to assess the long‐term effects of the 2003 reform on farm structure, landscape mosaic and biodiversity for a sample of EU regions. Impacts are quantified using a spatial agent‐based modelling approach by simulating agricultural development with links to indicators of landscape value. Our results demonstrate that eliminating the link between support payments and production has possible negative consequences for the landscape, but only under particular circumstances. It is shown that these effects could be offset by strengthening (Pillar II) agri‐environmental schemes. Further the single payment scheme results in higher land rental prices which reduces its ability to achieve its goal of providing income security for farmers. Implications of these results for the direction of continued CAP reform are discussed.