China’s Agricultural Policy Transition: Impacts of Recent Reforms and Future Scenarios

This article reviews recent developments in China’s agricultural domestic support policy, especially the transition from taxing farmers and agriculture to providing direct subsidies to grain production and purchased inputs. A model‐based quantitative analysis on the effects of these policy changes is presented. Simulation results suggest that recent policy changes have achieved the declared policy goals of increasing grain production and boosting farm income. Much of the increase in grain production and farm income can be attributed to higher per unit return to arable land, land reallocation to grain production and extra agricultural employment triggered by the policy changes. Based on the assumption that China’s public assistance to agriculture and farmers will continue and rise, two hypothetical future scenarios are simulated. Using all the support permitted under WTO de minimis limits with existing instruments, China’s policy will increase grain production, change trade patterns seemingly contrary to China’s comparative advantage, increase rural employment and significantly increase farm income (by more than 12%). If, however, decoupled instruments are applied to raise China’s agricultural domestic support to the same level, China’s agricultural production and trade will remain unchanged, rural employment remain stable, but farm income will be increased by nearly 15%.     

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.     

Off‐Farm Work,Intensity of Government Payments,and Farm Exits: Evidence from a National Survey in the United States

The last three decades have witnessed the continued exit of households from primary agriculture in the United States, where the average annual gross exit rate has averaged 10% per year. Understanding exit behavior is one key to future farm structure, management of abandoned land, depopulation of rural areas, and agricultural policy, including government program payments. This study empirically estimates the determinants of exit decisions of farm households. Particular attention is given to the roles of intensity of government payments and off‐farm work decisions of farm couples in the exit decision. Using a large farm‐level survey and controlling for endogeneity, results indicate that farm households with reduced intensity of government payments are more likely to exit farming. Households where the operator spouse works off the farm are more likely to exit farming. Additionally, households with older farmers, with the farm operator and spouse raised on a farm, and households operating farms located in Northern Great Plains are more likely to exit farming.     

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.     

Agricultural Subsidies and Rural Development

How consistent is a single farm payment system with rural development goals? A new economic geography model is used to compare coupled subsidies to ‘single farm payments’ effects on the location of farming, agro‐industry and non‐farm activity between rural and urban areas. This abstract model features a majority of employment in service sectors, farming vertically linked to manufacturing, and strong preferences for geo‐varieties. It appears that both coupled subsidies and single farm payments can decrease spatial agglomeration. But only the single farm payment policy raises welfare in both rural and urban regions of this stylised economy.     

Importance and Need for Rural Development Instruments Under the CAP: A Survey of Farmers' Attitudes in Marginal Areas of Greece

The present work assesses the attitudes towards importance and need for providing agricultural development instruments other than traditional grant aid mechanisms in rural areas. Assistance in marketing farm produce, provision of extension services on new agricultural technology, agricultural training and provision of quality standards are four of the instruments examined. The importance and need for providing these instruments depends upon producers' human capital accumulation and farm characteristics. The analysis indicates that different instruments may apply to different parts of the rural population and thus a flexible, multi-instrument and selective rural development policy may be required.     

Semi‐Subsistence Farming: An Elusive Concept Posing Thorny Policy Questions

The massive expansion of semi‐subsistence farming in the European Union after the Eastern enlargements poses a real challenge to rural development. The problems of semi‐subsistence farms are low cash incomes and incidence of poverty, sub‐optimal use of land and labour, a lack of capital and poor contribution to rural growth. However, they play an important welfare function in some rural areas in Europe; they manage more than 11 million ha of agricultural land and deliver ecosystem services. The Common Agricultural Policy will have to accommodate this now widespread production system, through existing or new policy packages. Particularly important is support for commercialisation to incentivise and smooth the transition to commercial agriculture, and agri‐environmental payments to compensate the semi‐subsistence farmers for the provision of ecosystem services.     

The Effects of Direct Payments on Technical Efficiency of Irish Beef Farms: A Stochastic Frontier Analysis

The 2003 Mid‐Term Review of the CAP sought to refocus the EU's farm support policy to foster a more competitive and market‐orientated agricultural sector. The foundation of this reform comprised the introduction of decoupled payments to farmers, replacing the EU's previous system of supports that were directly linked to production of designated crops and livestock. This paper explores the effect of coupled payments and their subsequent replacement by decoupled support, on the technical efficiency of specialist beef farms in Ireland. Given the high reliance of beef farmers in Ireland on CAP payments, the decoupling of payments has been especially important for the sector. A stochastic production frontier is estimated using a panel dataset comprising detailed accountancy data for Irish beef farms between the years 2000 and 2013. Our results indicate that technical efficiency in the beef farming sector has been consistently poor, with an average efficiency score of only 0.53 during the period analysed. However, we found that direct income received in the form of coupled payments had a positive impact on farm efficiency, and that this positive effect was maintained after their replacement with decoupled income support.     

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.     

Is Passive Farming A Problem for Agriculture in the EU?

We address a new agricultural policy concern following the decoupling of CAP direct payments in 2005: passive farming, whereby landowners maintain their agricultural area to collect payments without producing commodities. It is claimed that passive farming is hindering agricultural development by ‘blocking’ access to farmland for expanding farmers. We evaluate the links between the EU's Single Payment Scheme (SPS), passive farming, land use and agricultural development. Following identification of the rational landowners’ optimal land‐use choice, we evaluate the effects of the SPS using a spatial, agent‐based model that simulates farmers’ competition for land in a case‐study region of Sweden. We show that passive farming does not constrain land from being used in production; on the contrary more land is used than would be the case without the SPS. We conclude that passive farming is not a problem for agriculture, but provides public goods that would otherwise be under provided: preservation of marginal farmland and future food security. However SPS payments on highly productive land inflate land values (capitalisation) and slow structural change, which hinder agricultural development. Consequently CAP goals could be better served by targeting payments on marginal land and phasing out payments to highly productive land.     

The influence of direct payments on farmers’ hail insurance decisions

We analyze determinants of hail insurance use of Swiss farmers, using FADN panel data covering the period 1990–2009. Mixed effect logistic regression models are estimated to identify the most important farm and farmer characteristics that trigger insurance use. In addition, information on local hail risk is taken into account in these models. It shows that larger farms, with specialization in crop production, and with larger local hail risks are more likely to adopt the hail insurance. Moreover, insurance users are usually older and better educated. Since the early 1990s, Swiss agricultural policy has reduced price support and introduced general and ecological direct payments. This has led to a much higher importance of direct payments for farmers’ incomes. Our analysis shows that this development has contributed to decreasing hail insurance adoption rates in Switzerland over the period considered. Our results indicate that the larger the share of direct payments for total farm revenue, the less attractive is insurance as a risk management strategy for farmers. This interdependency should be explicitly considered by agricultural policy in the design of support mechanisms.     

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.     

Broad‐based Agricultural Development versus Food Self‐sufficiency: A General Equilibrium Analysis in India

Intersectoral linkages are analysed using a CGE model based on a SAM constructed from Indian national accounts data for 1988–89. The model includes the rural non‐farm sector, public sector production and aspects of public policy. Evidence supports the arguments of Chakravarty (1987) and Ahluwalia (1986) regarding the importance of broad‐based agricultural development as opposed to increased production in the food sector alone aimed at achieving food self‐sufficiency.     

The Effect of Mandatory Agro‐Environmental Policy on Farm Fertiliser and Pesticide Expenditure

EU farmers are subject to mandatory cross‐compliance measures, requiring them to meet environmental conditions to be eligible for public support. These obligations reinforce incentives for farmers to change their behaviour towards the environment. We apply quasi‐experimental methods to measure the causal relationship between cross‐compliance and some specific farm environmental performance. We find that cross‐compliance reduced farm fertiliser and pesticide expenditure. This result also holds for farmers who participated in other voluntary agro‐environmental schemes. However, the results do not support our expectations that farmers who relied on larger shares of public payments had a stronger motivation to improve their environmental performance.     

The impact of decoupled subsidies on productivity in agriculture: a cross‐country analysis using microdata

The decoupling of direct payments from production introduced in the reform of the Common Agricultural Policy is expected to make production decisions more market‐oriented and farmers more productive. However, ex‐post analyses of the productivity of farms have yet to uncover any evidence of a positive impact of the decoupling policy on farm productivity. Using Irish, Danish, and Dutch farm‐level data, we identify whether the decoupling policy has contributed to productivity growth in agriculture and farm product adjustment behavior. We find some evidence that the decoupling policy had significant positive effects on farm productivity and behavioral changes related to farm specialization.     

Assessing the Impact of the ‘Decoupling’ Reform of the Common Agricultural Policy on Irish Farmers’ Off‐farm Labour Market Participation Decisions

This paper assesses the impact of the ‘decoupling’ reform of the Common Agricultural Policy on the labour allocation decisions of Irish farmers. The agricultural household decision‐making model provides the conceptual and theoretical framework to examine the interaction between government subsidies and farmers’ time allocation decisions. The relationship postulated is that ‘decoupling’ of agricultural support from production would probably result in a decline in the return to farm labour but it would also lead to an increase in household wealth. The effect of these factors on how farmers allocate their time is tested empirically using labour participation and labour supply models. The models developed are sufficiently general for application elsewhere. The main findings for the Irish situation are that the decoupling of direct payments is likely to increase the probability of farmers participating in the off‐farm employment market and that the amount of time allocated to off‐farm work will increase.     

Off‐farm employment and reasons for entering farming as determinants of production enterprise selection in US agriculture

In today’s agriculture, farmers consider off‐farm employment and lifestyle goals in complex ways to select production enterprises. Data from USDA’s Agricultural Resource Management Survey were used to examine how off‐farm employment and ‘reasons for entering farming’ influence production enterprise selection in US agriculture. A two‐stage analysis with a multivariate tobit model was used to examine the impact of off‐farm employment as influenced by government farm programme payments, reasons for entering farming, demographics and location on production enterprise selection. Results underscore the impacts of reasons for entering farming and off‐farm employment on production enterprise choice and provide implications for policy development. The study highlights the importance of government farm programme payments in production enterprise selection by US farmers.     

The Challenge of Decoupling Agricultural Support

The Challenge of Decoupling Agricultural Support
Decoupling agricultural support has become a central feature of reforms in most OECD countries due to international and domestic constraints. There is evidence that this movement can reduce economic inefficiencies and contribute to improving policy design. Not all the characteristics, however, of recent new support programmes, reduce their impact on production. Moving from price support to area payments and granting more freedom in the use of the supported resources makes programmes more decoupled, but making payments counter-cyclical based on current production or market variables tends to exacerbate the production response of risk averse farmers. When all the effects are taken into consideration - relative prices, risk and dynamic effects - all agricultural support programmes have some impact on production and thus the degree of decoupling needs to be estimated empirically. Recent studies have expanded our scarce knowledge of these issues. They confirm the partial decoupling of area payments, like those in the EU after 1992, as well as the larger degree of decoupling that results from more production freedom, as in the Production Flexibility Contract payments in the US and the recent Single Farm Payment in the EU. But the total magnitude of the production effects depends on policy design and 'size', since high levels of partially decoupled support can have potentially significant effects on production.