Lecture 11. Analysis of decoupling

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Lecture 11.Analysis of decoupling

• Economics of Food Markets
• Alan Matthews

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Questions and lecture outline

• Can a payment to farmers ever be fully decoupled?
• Identification of mechanisms whereby payments may
  influence production
• Empirical evidence?
• What would design of decoupled payment look like?
• US Production Flexibility Contract payments
  introduced in 1996 FAIR Act
• EU Single Farm Payment scheme
• Bond scheme proposal (Swinbank and Tangermann)

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OECD definitions

• Full decoupling
• Where payment does not influence production
  decisions of farmers
• Both shape and position of supply and demand
  curves should not be affected
• Effective full decoupling
• Where policy results in a level of production and
  trade equal to that which would have occurred
  under free market conditions
• Example price support combined with quota
• May result in same equilibrium level of output
  but not necessarily same response to shocks
• Shape of supply (or demand) curve affected

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Degree of decoupling

• A measure of the production and trade effects of
  a policy package relative to those of an
  effectively fully decoupled policy
• Compare policy packages having the same ex ante
  impact on total PSE

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Decoupled payments?

• Static effects
• Arise from changes in the incentive prices of
  outputs and inputs
• Insurance and wealth effects
• Payment increases farmers wealth and this can
  affect farmers attitude to risk (wealth)
• Payment may affect the degree of risk faced by
  the farmer (insurance)
• Liquidity affects
• Payment may ease credit constraint and boost
  investment
• Expectations about future policies
• Influence entrance/exit from farming

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Decoupling static effect- no (less?) incentive
to produce- more extensive production
P
S
Pi
Pm
Q
Q1
Q2
7
Source OECD 2005
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Decoupled payments in EU production effects

• Size of effect can depend on modelling issues
• For EU/Ireland effects, see
• FAPRI Ireland
• Dixon and Matthews

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Future of decoupled payments

• Link to land creates land market distortions
• Compatibility with WTO Green Box rules
• CAP Health Check proposals
• upper and lower limits
• move to more uniform area payment