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SPS entitlements: activation, trade and valuation

The share of non-activated entitlements of the total distributed entitlements is low. For most EU study countries, it is less than 3%. The value of non-activated entitlements tends to be lower than the value of activated ones. Non-activated entitlements mainly stem from the absence of eligible area and administrative burdens. The share of activated entitlements tends to be somewhat higher in countries using the hybrid model than in those using the historical one. We find that this might be owing to specific criteria relating to the implementation of the hybrid model (Figure 3.10). There is a wide variation in the face value of entitlements among and within the EU study countries. This variation seems to be determined by the commodity structure, the level of support provided in the reference period, the SPS model applied, and implementation details.

There are large differences among the EU study countries in the restrictions on trading entitlements. EU regulations allow entitlements to be tradable but certain constraints are imposed by the European Union. Member states have some flexibility in introducing additional country-specific limitations on entitlement tradability. Spain, Italy and France have the tightest restrictions on entitlement trading. The trade of entitlements is most often conducted directly among farmers, although sometimes market agents or farm organisations play a role. Spain appears to have the most developed entitlement trading system, similar to an auction. There is no informal trading in entitlements, except among family members. An informal entitlement market was not found in any of the EU study countries, because, in order to receive payments, entitlement holders need to be identifiable. However, unofficial ‘trade’ may occur among members of the same family.

Figure 3.10. Share of activated entitlements in the total Utilized Agricultural Area

The data are for 2006 or 2007 depending on the country. Source: Ciaian, Kancs and Swinnen (2010).

The entitlement market tends to be smaller in regions under the hybrid model compared with the historical model. Under the historical model, trade is likely to be driven by structural change because the SPS was implemented in 2005-07, but the SPS entitlements were distributed based on land use in 2000-02. With the hybrid model, entitlement trading is driven by a combination of decoupling and the fact that relatively more entitlements were allocated than with the historical model. Structural change is less of an influential factor in the entitlement market under the hybrid model, as entitlements were distributed based on the area used in the first year of the SPS application. Differences in the implementation features of the two SPS models may explain the higher volume of trade with the historical model than with the hybrid one. This is chiefly evident in the short run, which is investigated in this paper. Preliminary evidence suggests that the trade in entitlements is also affected by the functioning of land markets, restrictions

on the tradability of entitlements, the availability of an opportunity to consolidate

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entitlements, and the amount of naked land.

Entitlements are most often traded with land. Evidence from the EU study countries shows that, with few exceptions, entitlement trades are usually accompanied by land.

Our data show that the market price for entitlements in most EU study countries is between one and three times the annual face value of the entitlement. A simple calculation would indicate that with perfect markets and without uncertainty, the entitlement price would be in the range of four to five times the face value if the SPS were to run until 2013 or in the range of ten to twenty if the SPS were to run indefinitely.

Several factors may explain the observed gap in the entitlement price between theoretical expectations and empirical evidence: 1) uncertainty about the future of the SPS (e.g. modulation and the health check); 2) the additional costs of the SPS (e.g. administrative costs); 3) the taxes and fees imposed on transactions; and 4) credit market imperfections. The low market price of the entitlements may also reflect the capitalisation of the SPS into farmland values (Ciaian et al., 2010).

 
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