The impact of CAP subsidies on the productivity of cereal farms in six European countries: A historical perspective (2008–2018)

Abstract

Productivity is an always-hotly-debated issue within the EU agricultural policymaking, particularly concerning the effect of subsidies distributed via the Common Agricultural Policy (CAP). The cereal sector is under particular political scrutiny nowadays, with the Ukraine conflict and environmental issues menacing food security levels for both developing and developed countries.Using individual farm data from 2008 to 2018 for France, Germany, Italy, Poland, Spain, and the United Kingdom, we investigate the effects of different subsidies on the cereal farms’ productivity, accounting for the intrinsic farms’ productivity levels (low, medium and high productive farms). The System-GMM estimator, combined with Inverse Mills Ratios, is applied within a three-step strategy to overcome endogeneity problems. Results highlight how CAP subsidies affect farms’ Total Factor Productivity (TFP), and to what extent they differ according to the nature of the subsidy, the country, and, interestingly, the intrinsic farm’s productivity level. The analysis reveals that TFP embeds an autoregressive behaviour that should always be accounted for when assessing the relationship with subsidies. Most of the CAP subsidies entail a negative-to-unsignificant effect on TFP, except for agri-environmental subsidies, which can increase farms’ productivity. Interestingly, the negative role of direct payments seems more recurrent in the low productive farms, accelerating their exit from the market.