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Direct payment distribution: an institutional approach

In order to alter support based almost exclusively on prices to a more market-oriented and budget-limited agricultural policy, the 1992 reform started to shift the main mechanism from guaranteed prices to direct “compensatory” payments. Its implementation allowed a theoretical targeting of farm support since policy makers were able to determine the amounts (coupled or decoupled to market prices and production;

static or dynamic), the criteria (respecting cross-compliance or providing specific amenities) and timing (bounded or not). In this context, the 1992 reform initiated the

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progressive targeting of the EU farm support.

Figure 11.1. Cumulative change in European Union price support in nominal and real terms

1991-2008

* 1992-2008. SMP skim milk powder Source: European Commission (2009).

Direct payments to crop areas were computed, by hectare, considering 1) national and regional average yields, and 2) scheduled price support decreases. Livestock direct premiums per head were revalorised and/or created. The aim was to compensate the negative effects on farm incomes and wealth resulting from the decreases in price support illustrated with Figure 11.1. The 2000, 2003 and 2009 reforms accentuated this trend, and decoupled partially direct payments from production levels and prices. Compensatory payments have been made “permanent” as they were not time-bounded and were systematically provided to all newcomers. Figure 11.2 summarises the institutional channels which aim at redistributing the past price policy support. The framework’s construction and interpretation are gradually explained below.

Figure 11.2. Redistributive institutional framework of CAP support reforms

The historical price market policy has benefited the largest and most intensive farm holdings. Indeed, the higher the volume of production, the higher was the support. As a result, distribution of support was discussed by policy makers when negotiating the 1992 MacSharry reform.4 However, this did not lead to an effective mechanism able to counterbalance the concentration of support on a few farm structures, sectors and geographic areas. The concentration of direct payment recipients was, and still is, not consistent with the distribution of its cost, which is shared out among taxpayers.

The agricultural sector faces dynamic economic forces which foster adjustments. Economic growth has drastically reduced the share of the agricultural sector in both GDP and total employment. Productivity gains have been higher in agriculture than in manufacturing (Martin and Mitra, 2001). These gains have been labour-saving, and have thus contributed towards reducing agricultural employment and increasing holding sizes. Dupraz, Latruffe and Mann (2010) considered the factors which force on-farm labour use, especially the level and type of agricultural support. They demonstrate that, in France, direct payments tend to discourage labour demand, whereas green or investment-targeted measures promote contract and hired labour in France. Ciaian, Dries and D’Artis Kancs (2010) present empirical results on EU agricultural labour adjustments (job destruction and creation). Significant differences between and among member states can be attributed to farm structural disparities. Indeed, regions with small average farm sizes display higher labour adjustments than those with larger average farm sizes.

Figure 11.3. Evolution of French average size and number of holdings for arable crops

1993-2005

Source: Data from ONIC-ONIOL/SCEES-DPEI; author's interpretation.

Figure 11.3 illustrates the evolution of French average size and number of holdings producing arable crops. On the one hand, the number of holdings dropped by roughly 30% between 1993 and 2005. On the other hand, the average size of arable crop holdings increased by half during the same period. This concentration of arable areas is in line with the concentration of support5, and interacts with the concentration of capital. Because it provides a wealth and insurance effect, subsidies influence farmers’ attitudes to risk (Hennessy, 1998). The assumption of decreasing risk aversion tends to increase investments in capital. As a result, the agricultural sector shows a concentration of both land and capital.

The 1992 reform did not limit direct payments for cereal, oilseeds and protein crops via restrictions on set-aside compensation as initially put forward by the Commission. Capping the total amount a farm may receive - though considered in the first proposals - was withdrawn in the final agreement. However, the exemption from compulsory set- aside for small holdings - those producing up to the equivalent of 92 tonnes of cereals- had been agreed. For the main livestock compensatory payments, i.e. the special premium for male bovines and the suckler cow premium, a stocking density rate criteria and a maximum number of heads were approved.

The 1999 reform continued the compensation of guaranteed price decreases with direct payments. However, in contrast to the 1992 reform, compensation was partial in order to counteract criticisms of overcompensation.6 Indeed, full compensation did not consider income increases from restructuring and entrepreneurial schemes on farm holdings, potential decreases in farm input prices, or off-farm activity development.

Following the 2003 reform, the implementation and management of decoupling schemes provided a unique occasion to redistribute Pillar 1 direct payments. Given the flexibility inherent in the Luxembourg agreement, the responsibility for such a decision lies with the member state. The full historic model possessed the ability to almost freeze the past distribution of support whereas the fully regionalised model redistributed it within a specified territory (region).

 
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