decoupling of direct payments lecture 9. economics of food markets alan matthews
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Decoupling of direct payments
Lecture 9.
Economics of Food Markets
Alan Matthews
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
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
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.
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
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
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
Can decoupled payments affect production?
Source: Baldwin June 2003 CAP Reform
Decoupled payments in an uncertain world
• Where farmers are risk averse– Wealth effects: Change in farmer’s 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
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.
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?
Source: OECD 2005 Decoupling – Policy Implications
Change in volume of output as result of MTR
Source: Dixon and Matthews, forthcoming
Farm Incomes
SHORT RUN LONG RUN
Cause
Primary factor price index Output (c) GVAF
Primary factor price index Output (g) GVAF
(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
Change in agricultural greenhouse gas emissions (CO2 equivalent)