Mark Brady

Ewa Rabinowicz

Sone Ekman

AgriFood-WP 2010:2

Impact of decoupling and modulation in the European Union: A sectoral and farm level assessment

Introduction of the Single Payment Scheme (SPS) in 2005 constitutes perhaps the most radical reform of the Common Agricultural Policy ever. This payment has replaced almost all previous forms of subsidies to farmers and is decoupled, i.e., paid regardless of whether the farmer produces or not, as long as land is kept in good agricultural and environmental condition (GAEC). Such a radical reform was expected to have a profound impact on European agriculture. This paper presents a synthesis of the findings of a large EU project, IDEMA. The aim was to assess the potential impacts of decoupling on production, prices, trade flows, farm income, structural change and the environment at the EU and regional levels. Due to the complexity of the issues at hand and the lack of historical data, three complementary evaluation approaches were used: surveys of farmers’ intentions, sector modelling and agent-based models of regional structural change.

Surveys and modelling results 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 decoupled because minimal land management becomes an additional source of income. Decoupling as a result is also shown to reduce farmers’ off-farm labour supply. In the New Member States the impact of the accession is the dominating effect: the introduction of CAP payments results in larger numbers of farmers remaining in the sector and increased competition for land.

Other aims of the reform included boosting farm incomes and improving competitiveness. The reform has also, undoubtedly, increased market orientation of EU farmers and reduced trade distortions. The SPS is shown to increase farm incomes but also land rental prices in most regions. Capitalization of payments in 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 impacts of the reform would have been very different if there was no link between the decoupled payment and land. Without the GAEC obligation model results indicate a strong increase in average farm size as greater numbers of farmers would leave the sector and make their land available to remaining farms (significant areas of land are though shown to be abandoned in the most marginal regions). Due to the significantly lower land (rental) prices and size economies that emerge from this policy, profits per hectare are generally higher. Thus it can be argued that the objective of improving competitiveness has not been achieved due to slower structural change and the higher land prices that follow from the 2003 reform.