Effects of decoupling direct payments on agricultural production and land use in individual member states of the European Union

Abstract

Decoupling of direct payments to farmers has probably been one of the most discussed issues in the agricultural environment within the last years. Regarding the European Union s (EU) new payment system, which has been established under the 2003 mid-term-review (MTR) reform, several groups of modellers have simulated the effects of decoupling in the last years. All studies conducted hitherto project a decline in the cereal and silage maize area as well as ruminant production in the EU-15, while model results are heterogeneous with respect to the direction of the decoupling effects on oilseed and pasture as well as voluntary set-aside area. A common feature is that all results of these studies refer to the aggregated EU-15 region. Assumptions on political and behavioural parameters are thus average values. The effects resulting from individual decoupling strategies followed under the MTR review can therefore not be observed. Against this background the purpose of this work is to analyse the sectoral effects of decoupling on area allocation and production for all member states of the enlarged EU individually so that the effects of country-specific decoupling policies can be measured. Actually, significant differences in the design of payments exist. With respect to the EU-15 France and Spain use the possibility of keeping direct payments (partly) coupled to production for all product categories. In contrast, Germany, Ireland, Greece, Italy, and the United Kingdom decided to decouple all payments (almost) completely. The analysis is conducted on the basis of the European Simulation Model 2007 (ESIM-2007), which is a multi-country, multi-commodity, recursive dynamic, partial equilibrium model. Compared to previous model versions the underlying model version has been extended in terms of country coverage in order to include individual member states of the EU-15 and in terms of the structural features of the model by including a land market module. ESIM-2007 results show that decoupling in EU-15 members leads to an are a shift from grandes cultures towards roughages. More generally, the more decoupled direct payments, the stronger is the substitution of roughages for grandes cultures. However, decrease rates for grandes cultures differ strongly between partial and full decoupling only in case of silage maize. In other words, most cereal and oilseed producers in France, Spain, and the NMS do not benefit heavily from the decisions of their governments to keep payments for cereals, oilseeds and protein crops partly coupled to production. Strongly increasing prices for land, which result from the significant increase in roughage and overall agricultural area, might contribute to this situation. Voluntary set-aside area increases in almost all countries of the EU-15 mainly resulting from the abolishment of the limit for voluntary set-aside area. Beef as well as sheep meat supply is projected to decrease on the EU-15 level. On individual member state level, however, ruminant supply develops quit! e different among member states. In contrast to the grandes cultures area, ruminant supply crucially depends on the decoupling option chosen under the MTR reform. This may be mainly due to the fact that the degree of coupledness of payments is allowed to be higher for ruminant payments. The policy option of keeping beef and/or sheep payments (partly) coupled to production under the MTR reform can even lead to an increase in beef and/or sheep production compared to a situation under Coupled payments. Thus, beef producers in Belgium and Luxembourg, Denmark, Finland, France, the Netherlands, Spain, and Sweden as well as sheep producers in Denmark, Finland, and France seem to benefit from the decoupling options chosen by their governments. However, in the case that all countries had to abolish direct payments for ruminants, producers in highly coupling countries would suffer compared to their situation under the MTR reform. Producers, whose countries opted for low subsidy levels or forgo direct payments for ruminants completely would benefit from further increasing producer prices on the Single European market.