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I The Impact of Decoupling on Agricultural Markets and Farm Performance

The impact of decoupling and modulation in the European Union: a sectoral and farm level assessment

Mark Brady, Sone Ekman and Ewa Rabinowicz1

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.

Since the early 1990s, the Common Agricultural Policy (CAP) has been gradually reformed towards increasing market orientation. Price-related support dominated agricultural policies in the EU other OECD countries in the 1970s and 1980s. Two reform packages in the 1990s replaced a large share of the price support in the European Union (EU) by direct payments per hectare of land and per head of livestock. These direct payments were only paid to certain crops and certain types of livestock. The latest substantial reform of the CAP, the 2003 reform, constitutes a further radical change of European policies for supporting farmers. The central element of the reform is decoupling of direct payments from production via a Single Payment Scheme (SPS). The SPS is paid per hectare of agricultural land, but is independent of the individual farmer’s output. It is paid regardless of whether the farmer produces or not, as long as the land is kept in Good Agricultural and Environmental Condition (GAEC). However, there are exceptions to the general principle of decoupling, since individual member states are currently allowed to keep limited coupled payments for some products (partial decoupling).

The reform was intended to make European agriculture more competitive and market- oriented, and at the same time to provide support to farmers with less distortion of production and trade. However, in the public debate preceding the 2003 CAP reform, it was argued that a decoupled SPS would lead to substantial abandonment of production in various regions and sectors, and an exodus from the most disadvantaged rural areas. Some farmers’ organisations argued that production would shrink and that considerable job losses would ensue. It was also claimed that farmers in less favoured regions might risk being squeezed out as economic land rents were often below the arable area payment. In this case, landowners might reclaim their land from leaseholders and cash the decoupled payment themselves. Another concern voiced was that decoupling would distort the market for previously unsupported products.

Assessing the potential impacts of decoupling was not a simple task because there are several potential links between support to agriculture and farm output. The impacts of support schemes that affect output prices are well known. These impacts can be removed by decoupling support from production, as is the case with the SPS. However, indirect effects may remain after decoupling, as agricultural support can induce production effects by its mere existence. These include the income effect, where the support potentially affects farmers’ choice of on-farm labour supply, a risk-related effect as risk-averse producers may increase output as a consequence of the support providing greater income security, and finally dynamic effects which may affect output through farmers’ investment decisions and their expectations about future policy. Studies of indirect effects of agricultural support to date have been few and with little consensus (Andersson, 2004).

 
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