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Production

Both the economic models (LEITAP and CAPRI) show that modulation, under the baseline scenario, has an overall positive, albeit small, production effect, although there are some differences between regions and products. This effect increases under the Health Check scenario. LEITAP suggests that the overall production effect under the Health Check scenario is positive for primary agriculture, with an overall increase in production of almost 0.4% compared to no modulation (Figure 15.3). In addition to the overall impact of modulation under the Health Check scenario, both Figures 15.3 and 15.4 also distinguish the impact of various groups of Pillar 2 measures, the impact of the whole Pillar 2 and the impact of reducing Pillar 1. The impact of Pillar 2 on production is positive (0.47%), while reducing Pillar 1 payments as a small negative production effect (-0.06%). The negative production effect of reducing Pillar 1 payments is limited as payments are decoupled. Pillar 2 payments, especially Axis 1 measures, increase production due to higher productivity growth and due to co-financing that increases the total subsidy budget available strongly. The positive production effect of modulation is primarily due to the impact of physical capital investments, which aim to increase productivity, thereby lowering costs and prices. Lower prices, in turn, slightly increase demand and competitiveness, both of which lead to increased production. Part of the explanation for the large impact of these measures is that a large share of Pillar 2 money (~25%) is spent on these measures, and hence a greater proportion of modulation funds will also be allocated to them. The same productivity impact can be expected as a result of investment in human capital; however, the impact is lower, since less money is distributed to these measures (~8%). The production impact of the LFA and agrienvironment measures is slightly positive, due to the fact that these payments keep some areas in production.

Figure 15.3. EU27 production volume of primary agriculture — 5% / 13% modulation

% change relative to no modulation in 2013

Source: LEITAP.

Looking at the increased rates of modulation under the Health Check scenario compared to the no modulation scenario, Figure 15.4 shows that the impact for EU15 is larger (0.45 % increase) than for the EU27 (0.4% increase) as modulation only applies to the new member states (excluding Romania and Bulgaria) from 2012, while it is in place for the EU15 for the whole 2007-13 period.

Figure.15.4. Production volume of primary agriculture - EU15 / EU27

% change of the Health Check scenario relative to no modulation in 2013

Source: LEITAP.

The impact is measured in 2013, assuming the application of modulation over the 2007-13 period. If one extends the period, the dynamic effects with regard to physical and human capital will mean that the impact, relative to the baseline scenario, becomes larger over time. This is because the effects are cumulative, in other words productivity gains in one year remain more or less constant over time, and every year adds a new productivity gain. The effect of reducing Pillar 1 direct payments and, for example, LFA payments remains more or less the same, as they are income payments.

 
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