Decoupling of direct payments

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Decoupling of direct payments

• Lecture 9.
• Economics of Food Markets
• Alan Matthews

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Lecture outline

• To provide an economic analysis of decoupling of
  direct payments
• To review studies on the impact of the MTR both
  in the EU and Ireland

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Impacts of decoupling

• Many studies
• Teagasc FAPRI-Ireland
• OECD
• Commission Impact studies
• FAPRI-US
• Dixon/Matthews (forthcoming)
• We look at some results from the Dixon/Matthews
  study

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Decoupled payments conceptual overview

• OECD dimensions (OECD, 2001)
• Theoretical dimension how do agricultural
  policies, including direct payments, potentially
  affect production and trade
• Empirical dimension what do we know about the
  actual production and trade impacts of different
  types of agricultural policies, including
  decoupled payments
• Regulatory dimension - best practice in the
  design of the most decoupled policies or policy
  practices, not least to be WTO compatible.

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Decoupling - definitions

• Full decoupling
• policy is fully decoupled if it does not
  influence production decisions of farmers and if
  it permits free determination of market prices
• Importantly, both the shape and the position of
  the supply and demand curves should not be
  changed
• Effective full decoupling
• Where policy results in a level of production and
  trade equal to that which would have occurred if
  the policy were not in place
• Example would be a coupled payment combined with
  a quantitative restriction equal to the old
  production level

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Example of how the definitions differ

• Although new policy (represented by S) yields
  the same level of output initially, adjustment to
  a demand shock leads to a different output level
  than before

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The degree of decoupling

• Comparing the degree of decoupling requires a
  reference, usually taken as the output effect of
  market price support
• From producer perspective, defined as 1 minus the
  ratio of the production effect of the policy
  package over the production effect of the
  equivalent (in PSE terms) price increase

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Can decoupled payments affect production?
Source Baldwin June 2003 CAP Reform
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Decoupled payments in an uncertain world

• Where farmers are risk averse
• Wealth effects Change in farmers total wealth
  can affect his attitude to risk
• Insurance effects If policy reduces the total
  risk faced by the farmer (e.g. price
  stabilisation scheme) it will have positive
  effect on output

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Decoupling in a dynamic world

• Where there are capital market imperfections, any
  kind of income support even decoupled will be
  partially reinvested in agriculture
• Where there are expectations of a future policy
  change and farmer can hope to influence this
  (e.g. change in base acreage for a payments
  scheme) decoupled scheme can affect production.

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Decoupling the effects

• Output effects
• By how much will output fall
• Environmental benefits arise through more
  extensive production
• but danger of land abandonment in marginal
  farming areas
• Long term sustainability?

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Source OECD 2005 Decoupling Policy Implications
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Change in volume of output as result of MTR
Source Dixon and Matthews, forthcoming
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Farm Incomes
  SHORT RUN SHORT RUN SHORT RUN SHORT RUN LONG RUN LONG RUN LONG RUN LONG RUN
Cause Primary factor price index Output (c) GVAF Primary factor price index Output (g) GVAF
Cause (a) (b) (a)(b) (d) (e) (f) (e)(f) (h)
Dairy Market Reform 2.34 0.01 2.35 2.30 -2.66 0.04 -2.62 -2.55
Decoupling 4.10 -5.11 -1.00 -1.00 9.14 -8.64 0.50 0.84
Rest of EU 1.79 0.38 2.17 2.18 1.38 0.66 2.03 2.00
Total 8.24 -4.72 3.52 3.48 7.85 -7.94 -0.09 0.29
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Change in agricultural greenhouse gas emissions
(CO2 equivalent)