Abstract
Common Agricultural Policy uses a large share of its budget to support and stabilise the income of EU farmers by means of direct payments (DP). This paper assesses how much and how DP reduce the variability of farm income over time. The analysis is developed on a constant sample of 2402 Italian farms during the decade 2003–2012. It considers both the whole sample and farms grouped according to: types of farming; economic size classes; relative importance of DP. Income variability is analysed by mean of variance decomposition by income components. Variability of farm income over time is high and most of it is coming from the revenue component. The DP stabilise farm income and this is mainly because DP are less variable than the remaining part of income. Indeed, DP are found to play a very limited countercyclical role against fluctuations of the remaining part of farm income. Finally, DP are not targeted to those farms facing the highest level of income variability. These latter two results suggest that, while DP stabilise farm income, there is a potentially large room of manoeuvre for increasing the efficiency of DP as income stabilising tool.
Highlights
A large share of the support provided to EU farmers by the Common Agricultural Policy (CAP) is delivered by means of Direct Payments (DP)
EU direct payment policy and farm income stabilisation Most of the support provided to EU farmers by the Common Agricultural Policy (CAP) is delivered by means of Direct Payments (DP) that account for around 77 % of the Producer Subsidy Estimate provided by CAP (OECD 2014)
Because we focus on the whole farm income and the role of DP, it is more suitable to applying the variance decomposition that relies on additive components
Summary
A large share of the support provided to EU farmers by the Common Agricultural Policy (CAP) is delivered by means of Direct Payments (DP). These are aimed at increasing and stabilising farm income as well as supporting farmers to deliver a multiplicity of goods and services. The first objective of the analysis is to estimate the extent of farm income variability over time at farm level This is important to assess whether the recent introduction within the CAP of measures aimed at supporting farmers to manage risk is justified. There are not many analysis focused on the stability of the whole farm income even if “... farmers are concerned more about their net incomes than about prices and costs” (Mishra and Sandretto 2002, p. 219)
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