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The economic impact of allowing partial decoupling under the 2003 Common Agricultural Policy reforms

Alan Renwick, Torbjorn Jansson, Steven Thomson, Cesar Revoredo-Giha, Andrew Barnes and Gerald Schwarz1

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.

The agreement to decouple European Union 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. The European Commission noted that during the pre-reform discussions concerns were raised by some member states that full decoupling of Common Agricultural Policy (CAP) support might lead to “abandonment of (agricultural) production, the lack of raw material supply for processing industries, or to social and environmental problems in areas with few economic alternatives” (EC, 2008). As such, under the reformed CAP, the SPS provided member states with the scope to retain some coupled support. In addition, the national envelopes established under the Agenda 2000 reforms were extended to enable up to 10% of the national ceiling for any sector’s Pillar 1 payments to be diverted into national envelopes which could be used to support “specific types of agriculture which are important for the protection or enhancement of the environment, or for improving the quality and marketing of agricultural products”, otherwise known as Article 69 measures.2 Furthermore, member states were also allowed to introduce voluntary modulation alongside the compulsory EU modulation as a means of redirecting support towards Pillar 2 rural development measures.

The most important aspect of the 2003 CAP reform package was the replacement of production subsidies (e.g. Arable Area Payments Scheme and Suckler Cow Premium, Sheep Annual Premium) with a single direct payment, conditional on meeting crosscompliance requirements that farmers meet minimum animal welfare, quality and environmental standards. Many studies (see Renwick et al., 2008; Halmai et al., 2006; Swinbank, 2005) have discussed how a complex CAP model has now developed as member states were given options for implementing the SPS, specifically options to:

  • • implement the SPS at any time between 2005 and 2007;
  • • re-allocate part of the support through the national envelope (Article 69 measures);
  • • choose from the regional, historic, static-hybrid or dynamic hybrid models of the SPS;

and

• introduce voluntary modulation (only taken up by Portugal and the United Kingdom,

and within the United Kingdom there are some differences in its use).

In addition, there were also limits on the levels of coupled payments retained for different sectors, as indicated in Table 2.1. As this table also highlights, these limits were amended following the CAP Health Check in 2009.

Under the 2003 Luxembourg agreement, member states were given the option to choose from three SPS implementation models: the “historic” model; the “regional” (or flat-rate) model; and, the “hybrid” model. With the historic model, SPS payments are farm-specific and relate to the support received in the reference period (average of 200002). The regional model uses a per-hectare payment to all farmers in a region, whilst the hybrid model uses a mix of the historic and regional payments. Specifically, the hybrid model can be static (as in Northern Ireland where the relative proportions of historic and regional payments remain the same) or dynamic (as in England where there is gradual movement from the historic model to a fully regional model).

Eligibility for SPS payments are conditional on cross-compliance, with farmers being required to respect Statutory Management Requirements (SMRs) relating to public, plant and animal health, environmental and animal-welfare requirements whilst maintaining land in Good Agricultural and Environmental Condition (GAEC). The SMRs and GAEC suggest that some public goods are provided by farmers in return for the SPS payment.

The flexibility in implementing the SPS has meant that there is a range of models and different levels of decoupling across member states. Some countries, notably France and Spain, continued to maintain as much coupled direct payments as possible, with many other EU15 countries operating largely decoupled payments or only maintaining some partial coupling (usually in the beef sector). Figure 2.1 shows the diversity in implementation models and levels of decoupling across the EU15.

Table 2.1. Level of coupled support for selected products pre- and post-2009 CAP Health Check

Sector

Maximum rate of coupled support (%)

2009 CAP

Health Check Outcome

Cereals and oilseeds

25

To be decoupled by 2010

or supplementary durum wheat aid

40

To be decoupled by 2010

Sheep and Goat

50

No change

Beef

Slaughter Premium - Adults

40

To be decoupled by 2012

and Suckler Cow Premium

100

No change

or Special Beef Premium

75

To be decoupled by 2012

or Slaughter Premium - Adults

100

To be decoupled by 2012

plus Slaughter Premium Calves

100

To be decoupled by 2012

Source: Adapted from European Commission (2009a and 2009b).

Figure 2.1. Schematic representation of SPS implementation model and degree of decoupling in the EU15 (and within the United Kingdom)

The main purpose of this paper is to consider the economic impacts arising from these alternative approaches to implementation of the 2003 reforms, particularly relating to the degree of coupling of payments. With the aid of a simple simulation model, the next section considers the possible effects on production and prices of maintaining coupled payments and highlights the need for an empirical study to help improve understanding of the actual impacts. Following a description of the modelling exercise undertaken, the results which arise are discussed. The final section briefly summarises the main findings.

 
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