Three essays on the impact of the Common Agricultural Policy on Irish farms

O'Neill, Stephen
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Since its establishment by the Treaty of Rome in 1958, the Common Agricultural Policy (CAP) has had a huge impact on the agricultural sector in Europe and more widely. The original CAP altered production incentives, distorting input and output markets. The CAP has undergone a number of reforms, most recently the Fischler reform in 2003 which sought to remove the link between production and farm income support payments. Chapter 1 of this thesis offers some background on the Common Agricultural Policy and outlines the thesis. The move to `decoupled' payments, and its impact on land rental markets, is the focus of Chapters 2 and 3 of this thesis. In October 2011, the European Commission published proposals for further CAP reform (European Commission, 2011). At the heart of the proposals were reforms to the way in which Pillar I income support subsidies were distributed (both between Member States and between farmers within each Member State) and the linking of Pillar I direct income supports explicitly with environmental objectives (so-called 'greening'). Chapter 4 of this thesis explores the impact of changes in the distribution of subsidies upon the farm income inequality in the UK and Ireland. Chapter 5 discusses the findings and limitations of this research and suggests some future directions for research. I next offer abstracts of the three substantive chapters in this thesis. Abstract for Chapter 2 This chapter analyses the impact of the recent decision by the European Union to `decouple' agricultural support payments from agricultural production on Irish farmers' land market decisions. The land market participation decisions of Irish farmers are modelled using dynamic probit models while the extent of participation decisions are modelled using dynamic tobit models. Decoupling does not appear to have dramatically altered farmers' land market decisions. One likely explanation for this is the cross-compliance obligation for farmers to maintain land in a state fit for agricultural production in order to receive their full payments. Abstract for Chapter 3 In this chapter the effect of decoupling on the capitalisation of agricultural subsidies into agricultural rents in Ireland is analysed using a dynamic rental equation estimated with a two step system GMM estimator that accounts for expectation error and endogenous regressors. The findings illustrate the importance of institutional details in determining the extent to which subsidies are capitalised. In the period prior to decoupling Pillar 1 subsidies were highly capitalised into Irish agricultural rents in both the short and the long run. Depending on the farm system considered between 67 and 90 cents per euro of subsidies were capitalised into agricultural rents. In the post decoupling period the rate at which Pillar 1 subsidies are capitalised into Irish agricultural rents is found to have declined. This change is likely due to the short term character of the Irish agricultural land rental market, where 11 month rental periods predominate, and the freedom that the 2003 reform of the CAP offered farmers to consolidate entitlements established on rented land. The generally very short term nature of Irish agricultural rental contracts offered farmers an opportunity to consolidate entitlements that is unlikely to have arisen in other Member States with agricultural land rental markets characterised by long term contracts. The results in both the pre and post decoupling periods highlight the high degree of inertia of agricultural rents in Ireland, and the importance of accounting for dynamics when investigating the capitalisation of agricultural subsidies into land rents. The high degree of inertia in rents means that the impact of previously capitalised agricultural policy persists through time. Abstract for Chapter 4 The agricultural sector in Europe is heavily dependent on support payments made as part of the Common Agricultural Policy. In 2011, the European Commission published proposals for CAP reform which might lead to the introduction of a basic payment scheme consisting of flat rate per hectare payments, possibly determined at a regional rather than national level. This paper explores the role that these payments may play in reducing farm income inequality in the UK and Ireland. Flat rate per farm payments are also considered to explore how a more dramatic reform would reduce inequality. Movement to flat rate per hectare payments does not uniformly decrease inequality of Farm Net Value Added (FNVA) in contrast to what one may anticipate a priori, in fact in Scotland the inequality of FNVA increases in this analysis. In contrast, flat rate per farm payments reduce inequality substantially.
Teagasc Walsh Fellowship
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Attribution-NonCommercial-NoDerivs 3.0 Ireland