Disaggregated Impacts of CAP Reforms

Disaggregated Impacts of CAP Reforms

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Edited By:Catherine Moreddu
08 Feb 2011
9789264097070 (PDF) ;9789264096530(print)

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The Common Agricultural Policy (CAP) is an important policy for the European Union and accounts for about 40% of the EU budget. Ever since its inception in 1958, the CAP has been regularly reviewed and adjusted to improve its performance and adapt to changing circumstances. At a time when the post-2013 future of the CAP is being discussed and major challenges such as food security and climate change lay ahead, it is important to review the impact of past reforms and to draw lessons for the design of future policies.

While the studies in these proceedings often take account of national and international market effects of agricultural policies, they tend to focus on the impact of policies on farms and at the regional and local levels. Today, the European Union is composed of very diverse regions that are affected very differently by any given farm policy, depending on the structural characteristics of the farms’ and regions’ economies.

This report collects papers presented at the OECD Workshop on Disaggregated Impacts of CAP Reforms, held in Paris in March 2010, which focused on recent reforms. In particular, it examined the implementation of the single payment scheme since 2005 and the transfer of funds between different measures. Special attention was also paid to reforms of the sugar and dairy sectors with respect to the quota system and the restructuring of both these industries. The papers also look at the impact of the new direct payment system on land use, production and income.

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  • Foreword
    The OECD Workshop on the Disaggregated Impacts of CAP Reforms was held in Paris on 10-11 March 2010. It was organised as part of a wider project to evaluate 25 years of reforms of the Common Agricultural Policy of the European Union. The workshop focused on reforms since 2003 and their impact at the national, regional and farm levels.
  • Abbreviations
  • Overview
    At a time when the post-2013 future of the Common Agricultural Policy (CAP) is being discussed, it is important to review the impact of past reforms and to draw lessons. The CAP has regularly been reviewed and adjusted to improve its performance and adequacy to changing circumstances. Successive reforms have reduced market intervention and border protection, and increased the share of direct payments to producers in total support. Payments have been gradually delinked from current production or production factors to the extent that a large share of payments is now granted with no requirement to produce. Decoupling support from current parameters has contributed to making producers more responsive to market signals. Through a mechanism of transfers of funds from the first to the second pillar of the CAP, called "modulation," reforms have also increased the share of payments targeted to specific objectives, such as improving the environmental performance of agriculture or its competitiveness.
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  • Expand / Collapse Hide / Show all Abstracts The Impact of Decoupling on Agricultural Markets and Farm Performance

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    • The impact of decoupling and modulation in the European Union: a sectoral and farm level assessment
      This chapter presents the main findings from the IDEMA project on the impact of the single payment scheme on production, prices, trade flows, farm income and structural change at the European Union and regional levels. Three complementary evaluation approaches were used: surveys of farmers’ intentions, sector modelling and agent-based models of regional structural change. The findings provide no strong evidence that farmers intend to change their strategic decision to exit agriculture. Instead, structural change is shown to slow down when payments are more decoupled because minimal land management becomes an additional source of income. The reform has increased the market orientation of EU farmers and has reduced trade distortions. The single payment scheme is shown to increase farm incomes, but also land rental prices in most regions. Capitalization of payments into land values over time will, however, erode the ability of the reform to support incomes in the long run as incumbent farmers retire or otherwise leave the sector. The impact of the reform would have been very different if there had been no link between the decoupled payment and land.
    • The economic impact of allowing partial decoupling under the 2003 Common Agricultural Policy reforms
      The agreement to decouple European Union (EU) direct farm payments from production and to introduce the Single Payment Scheme (SPS) was formally made by the Council of Agricultural Ministers in June 2003. Due to concerns raised, the SPS provided member states the scope to retain some coupled support and this option was taken up by some member states but not others. This chapter, using conceptual and empirical analyses, assesses whether and to what extent partial decoupling is affecting the single market, and the effect it has on those countries and sectors that have embraced full decoupling. The results of a modelling exercise (using the CAPRI model) highlight that production in coupled countries is higher than would be the case if they had decoupled, and this has subsequent impacts on other EU member states through price and trade effects. This is particularly the case in the beef sector. Though the aggregate EU production and price impacts are generally small, the production impacts on certain member states and regions are more marked. Overall welfare levels in the European Union would have been higher if full decoupling had been implemented, and these gains would have been highest in the countries that remained coupled, particularly France and Spain.
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  • Expand / Collapse Hide / Show all Abstracts The Impact of the Single Payment Scheme on Land Markets and Farm Structure

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    • European Union land markets and the Common Agricultural Policy
      This chapter analyses the impact of the Common Agricultural Policy (CAP) direct payments on land markets in the European Union. It starts with a theoretical model, followed by an overview of the empirical findings. Next is presented the empirical evidence of a natural experiment, i.e. the accession of several countries to the European Union where as a result of accession CAP measures have been introduced, and of the impact of the Single Payment Scheme (SPS) reform in the old EU member states (EU15). The results provide preliminary evidence and are mainly based on theoretical analysis and expert interviews. The main limitations are the scarcity of the data on land values and the short time span since the implementation of decoupled CAP subsidies in the European Union.
    • The impact of the Health Check on structural change and farm efficiency: a comparative assessment of three European agricultural regions
      An assessment of the effect of the regionalized single payment system on farm behaviour and farm economic performances is proposed for understanding the potential consequences for European Union farms. The methodology adopted for this purpose is based on positive mathematical programming (PMP) integrated with a cluster analysis technique. The PMP model is used for assessing farm responses towards changes in policy and market scenarios, while cluster analysis is implemented for mapping the characteristics of the farms before and after the regionalization introduction, thus observing the dynamics in production composition and economic results. The simulations demonstrate a differential capability of farms in reacting to new policy and market scenarios, and how regionalization contributes to reducing differences in the production and economic characteristics of the investigated farms.
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  • Expand / Collapse Hide / Show all Abstracts The Impact of Dairy Reform

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    • European Union dairy policy reform: impact and challenges
      Recent Common Agricultural Policy (CAP) reforms have affected dairy policy, including the milk quota system, and increased the market orientation of the sector. A modelling exercise, using the European Dairy Industry Model (EDIM), simulates an initial sharp decline in the EU milk price in response to the decrease in the intervention prices of butter and SMP after 2003, followed by a period of stability and an increase from 2007/08 as the demand for dairy protein products increases over time and EU milk supply is still restricted by quotas. The phasing out of the milk quota following the implementation of the 2009 Health Check is estimated to lead to an increase in milk production and a decrease in the milk price both within and without the European Union. The gap between EU domestic and border prices is expected to continue to narrow. Looking at developments in dairy markets between 2000 and 2007, the study finds that milk prices did not decrease as much as expected because the intervention prices were no longer binding, in particular for skimmed milk powder. The income of dairy farms increased as decline in milk prices was more than compensated by the introduction of dairy premium and higher farm productivity due to the increase in farm size. However, since 2007, incomes of dairy farmers have strongly fluctuated as both milk and feed prices have been highly variable in opposite directions.
    • The impact of decoupling and price variation on dairy farmers' strategy: overview of theoretical and real effects
      The reform of the Common Agricultural Policy (CAP) in 2003 has resulted in substantial changes to the way in which dairy farmers are subsidized. Moreover, dairy farmers are also facing an unprecedented situation with major price fluctuations of agricultural raw materials. In this chapter, we discuss the cross effects on the productive strategy of French dairy farms due to the 2003 reform and to price variation. A model based on mathematical programming has been developed to determine how dairy farmers might re-evaluate their systems to identify an optimal production plan. While respecting the principle of agent rationality (maximization of profit), the model incorporates the economic risk related to the volatility of input and output prices. Thus, the model maximizes the expected utility of income while taking into account a set of constraints: regulatory, structural, zoo-technical, agronomic and environmental. This model allows a large choice in term of intensification level (input use) and productive combination. The model is applied to four types of dairy farms to show their different reactions to the reform. The simulations show how the implementation of the single payment scheme encourages farmers to increase the share of grassland. However, the increase in cereal prices is a strong incentive for farmers to intensify forage production in order to free up land for crop production. The decoupling of premiums for male bovines led farmers to reduce, all things being equal, this activity in order to increase cereal production.
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  • Expand / Collapse Hide / Show all Abstracts The Impact of CAP Reform on the Agro-Food Industry

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    • Scenar 2020-II: Decomposition analysis to understand policy impacts on agricultural primary production and related processing sectors
      This analysis, using a suite of models and statistical methods, decomposes the individual effects of various policy components on the outcome of three policy scenarios developed as part of the Scenar 2020-II study: a reference scenario, a conservative scenario, and a liberalisation scenario. A brief description of the economic modelling framework, policy representation and scenarios is presented, followed by an analysis of the impact of border measures, of the blending requirements of the EU Renewable Energy Directive, and of Pillar 1 and Pillar 2 payments of the Common Agricultural Policy on agri-food trade, agri-food production and land use. The decomposition analysis helps to identify the elements that drive the effects of policy reform.
    • The impact of the European Union sugar reform on the beet processing sector
      The sugar sector was reformed in 2006 along the lines of the 2003 Common Agricultural Policy (CAP) reform, with reductions in administered prices partially compensated by decoupled payments. The public intervention system was also gradually replaced by private storage, the quota system simplified and payments were made to producers and companies who renounced their quotas. This resulted in major reductions in the area under beet production, with five countries completely abandoning sugar beet production. The number of growers decreased sharply but yields increased. The restructuring programme became successful after incentives were raised: it resulted in about 5.5 million tonnes of production quotas being renounced and a decrease in the number of sugar factories between 2005 and 2009. This has led to greater efficiency in the sector. Domestic market development had significant impacts on trade and the world market: The European Union became the world's leading net importer, EU exports declined and world market prices increased. As a result, the cost of export refunds decreased.
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  • Expand / Collapse Hide / Show all Abstracts The Impact of CAP Reform on the Distribution of Support and Income

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    • The impact of SPS implementation options on the distribution of support
      This chapter uses the example of France and Germany and data from the EU FADN to project the distributional effects of the Single Payment Scheme (SPS) based on historical or regional references. For Germany, the principles of the hybrid and regional models are described and their effects on the distribution of direct payments, production and income by region, farm and farm size are estimated. The period 2004-13 is characterised by significant transfers of entitlements, from intensive beef fattening and dairy farms to extensive, grazing cattle farms, as well as a moderate regional redistribution in favour of regions with natural handicaps. Differences occur depending on farm size. The analysis of income developments over 2004-09 suggests some influence of SPS developments on income up to 2007, but as of 2008 changes in income levels are mainly driven by price developments, with larger farms appearing to adjust better to price decreases than smaller ones. Finally, a brief outline is given about the effects of possible alternative options of direct payments at the European Union level.
    • The CAP Health Check in France: A significant redistribution of payments?
      This chapter presents an analysis of the consequences of the implementation, in France, of the Health Check of the Common Agricultural Policy (CAP). The simulations, conducted with the Farm Accountancy Data Network (FADN), demonstrate a shift of direct payments in favour of extensive grazing farms, mainly those with a high proportion of pasture in their rotation. By contrast, crop farms and farms with intensive production of cattle are losers. The redistribution of direct payments permitted through modulation and Articles 63 and 68 of the European Council (EC) Regulation is favourable to disadvantaged areas, particularly mountainous areas. This change in the CAP is moving towards increased standardization of the amount of decoupled payments per hectare. In addition, it promotes a more focused allocation of resources for the protection of natural resources and compensation for environmental and territorial services.
    • Distribution of agricultural direct payments: the case of France
      This chapter examines some facts concerning French distribution of agricultural direct payments. France has developed a hybrid historical model in its attempt to renew a strong "market support and direct payment" pillar, mostly with environmental and territorial targeted subsidies. It grants to Pillar 1 a "rural development" dimension and magnifies the related responsibilities attributed to national authorities without observing the co-funding principle, thereby jeopardising the relevance of the Pillar 2. Evidence on the French distribution of direct payments suggests three sound assumptions: 1) reforming the direct payment system cannot be driven by equity considerations alone but also by public policy efficiency, especially when contemplating the diversity of the agricultural sector; 2) distribution of support has to be considered in line with policy objectives, but remains frequently incoherent; and 3) the partial redistribution of support which results from the 2009 Health Check of the Common Agricultural Policy shows that French conservatism is progressively declining.
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  • Expand / Collapse Hide / Show all Abstracts The Impact of CAP Reform on the Environment

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    • The impact of CAP reform on the environment: some regional results
      This chapter presents the findings of a European Union (EU) project, IDEMA, on the potential environmental impacts of the 2003 CAP reform for a selection of case-study regions. Due to the complexity of the issues at hand and the lack of historical data, the assessment was based on dynamic agent-based modelling with the extended AgriPoliS model. Our results indicate small impacts in relatively productive regions, since land use remains largely unchanged. In marginal agricultural regions, however, decoupling is shown to have a negative impact on biodiversity and landscape mosaic because of the homogenisation of land use that results from land being taken out of production. Existing agri-environmental schemes and national support acted to buffer the full potential impacts of decoupling on landscape values in these regions. The modelled effects of the reform would have been more radical if there had been no link between the decoupled payment and land, i.e. the GAEC obligation.
    • Environmental consequences in Austria of the 2003 CAP reform
      A core element of the European Union 2003 Common Agricultural Policy (CAP) reform was to decouple income support from production. Such subsidies have been classified as environmentally harmful by the OECD. This chapter reports ex ante estimates of the environmental consequences of this policy reform and compares observed outcomes of agri-environmental indicators. The findings show that the CAP reform of 2003 actually brought about environmental improvements which the previous reform (Agenda 2000) had promised but did not deliver.
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  • Expand / Collapse Hide / Show all Abstracts The Impact of CAP Reform on Rural Development

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    • The impact of the CAP on regional employment: a multi-modelling cross-country approach
      The research reported in this chapter refers to five European Union (EU) selected regions (Emilia Romagna, Italy; East Wales, United Kingdom; Anatoliki Makedonia and Thraki, Greece; Östergötland, Sweden; and Kassel, Germany) to identify and measure the Common Agricultural Policy’s (CAP) effects on employment throughout regional economies. It accounts for agricultural and non-agricultural effects, and covers the diversity of EU rural regions. A framework of three different approaches was developed and then applied to these five regions in order to trace out the current and anticipated employment effects of Pillars 1 and 2 changes. The focus of this work is to consolidate the conclusions derived from the different models applied in order to deduce valuable policy generalizations and to derive conclusions which may guide policymakers in making decisions related to regional and rural development. The results demonstrate that CAP funding, particularly for Pillar 2, contributes to the maintenance of employment in the farming sector but also in the non-farming sector, thus serving as a permanent regional "stimulus" package.
    • The impact of modulation as a policy instrument
      In the current situation of limited empirical evidence on the impact of modulation, a combination of modelling and non-modelling approaches is used in a study for Directorate General Agriculture and Rural Development in order to provide a comprehensive analysis of consequences on distribution of funds and budgets, farm structure, socio-economic conditions (competitiveness, farm income, employment, quality of life) and environmental quality. This chapter analyses a variety of economic outcomes achieved through a range of modelling methods.
    • Spatial structure of agricultural production in France: the role of the Common Agricultural Policy
      This chapter analyses the regional dynamic and spatial distribution of agricultural production in France. The analysis is based on data obtained at two spatial levels: region and département, and the data cover the period from 1990 to 2006. Different methods are applied to analyse the French production structure: maps and regional specialization are combined with regional concentration, the calculation of spatial autocorrelation and a local indicator of spatial association. These methods are applied to ten agricultural sectors. Results indicate that the activities which are regionally concentrated are not inevitably spatially autocorrelated, especially for production activities which are supported by the Common Agricultural Policy (CAP). A more specific analysis was conducted to determine the factors influencing the spatial dynamics using as an application the dairy sector (which is revealed as the most spatially autocorrelated). This approach was applied using spatial econometric models for dairy production in 1995 and 2005. It shows that market signals are more important in determining the dairy farm location in 2005 than they were in 1995. Environmental regulations also become more relevant in 2005 than in 1995, and seem to decelerate the rate of concentration amongst dairy farms
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