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.