Abstract
There is a consensus that farmers are subject to farm price-cost squeeze (PCS) when commodity prices fall and costs of production rise long-term. Willard Cochrane was the first to examine this phenomenon, introducing the notion that farmers are on a market treadmill. PCS is still a principle economic problem in agriculture touching farms in all over the world. It results from flexible prices but also from monopsony structures where recipients of commodities seize the opportunity of suboptimal pricing. Many studies indicate increasing retail farm price spreads but this lacks empirical studies on the effects of different types of subsidies on PCS. This work attempted to model EU Common Agricultural Policy (CAP) impact on PCS using the Constant Elasticity of Substitution (CES) production function, specified as in most CGE models. However, the authors tested the assumption of flexible prices reacting to changes in productivity. This approach is novel, while supported with an input-output analysis used to precisely decompose price and volume (productivity) effects at the level of a FADN representative farm. The results help to shape CAP shedding light on the present treadmill mechanism and showing that provision of public goods may be a remedy for market imperfections, whereas decoupled payments have the opposite influence.
Highlights
When farm commodity prices fall and costs of production rise, farmers can get caught in a “farm price-cost squeeze”
The authors take an attempt to fill this gap through modelling Common Agricultural Policy (CAP) variables affecting price-cost squeeze (PCS) according to the Constant Elasticity of Substitution (CES) production function using a specification in line with the production technology modelled in most CGE models
If we take into account EU-27 averages, we notice that only Vth and VIth SO classes are subject to PCS
Summary
When farm commodity prices fall and costs of production rise, farmers can get caught in a “farm price-cost squeeze”. The research tests two hypotheses 1/ agricultural prices are flexible, in the meaning that they react to the changes in productivity, as the treadmill theory assumed 2/ CAP direct payments stimulate PCS, while payments for public goods and investment subsidies have the opposite effect being a remedy for PCS. European farmers are the most important stakeholders of the formulated problems, testing the second hypothesis is a matter of social wellbeing since providing public goods contributes to the sustainable development. Those solutions which improve a market mechanism and promote ecological attitudes at the same time are the most desirable for policymakers (Chodakowska & Nazarko, 2017)
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