agrir

egio

nie

urop

a

The impact of pillar I support on farm choices: conceptual and

methodological challenges

Daniele Moro and Paolo Sckokai

Università Cattolica, Piacenza, Italy

122nd European Association of Agricultural Economists Seminar

Evidence-Based Agricultural and Rural Policy MakingMethodological and Empirical Challenges of Policy Evaluation

February 17th – 18th, 2011, Ancona (Italy)

associazioneAlessandroBartola studi e ricerche di economia e di politica agraria

Centro Studi Sulle Politiche Economiche, Rurali e AmbientaliUniversità Politecnica delle Marche

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

First Pillar– Budget

• First pillar is still 75% of the EU agricultural budget (43.4 bln € in 2010)

• Decoupled payments (SFP) cover 57% of the EU agricultural budget (33.3 bln €)

– Future CAP• Post-2013 CAP likely to be structured again in two pillars• SFP likely to be again the most important policy tool

(although eventually revised)

Background and motivation

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Key issue, given policy developments and WTO agenda:– Impact of decoupled payments (SFP) on farm

choices (not just on farm output)First analyses of decoupling (Fischler reform

scenario vs. continuation of old policies) – PE and GE models adopted arbitrary (implicit

or explicit) “coupling” factors attached to the SFP

• (Gohin, 2006; Balkhausen et al, 2008)

– This is a clear signal of the difficulties in modelling the complex impact of decoupled payments on farm choices

Research questions (1)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

(Some) mechanisms through which decoupled payments may affect farm choices:– Farmers’ risk aversion (wealth and insurance

effects)– Dynamic impact on investment decisions– Expectations on future policy developments– Relaxing credit constraints– Capitalisation in land values – Entry/exit decisions– Labour/leisure choices and on farm/off farm

labour allocationThis list is not new (see OECD, 2001)

Research questions (2)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Review the available studies on the impact of decoupled payments on farm choices – Focus on econometric analyses of farm-level

data (i.e. individual response matters)Develop a stylised model of profit/utility

maximisation, through which the above mechanisms are analysed

Discuss the main results (what do we know with a reasonable level of ‘uncertainty’?...)

Propose an agenda for further research by agricultural economists

Objectives of the paper

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Risk in agriculture – two dimensions: market (price) risk and

technological (output) riskRisk neutrality

– decoupled payments do not affect marginal production decisions

– risk neutral (primal or dual) models widely used to analyse coupled or partially coupled tools (area payments, quotas)

– in these studies, some relevant issues not always fully addressed (i.e. estimation of ex-ante cost-functions)

Decoupling and risk (1)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Risk aversion: theory– Under DARA, decoupled payments may

display• a positive wealth effect• a positive insurance effect, when payments reduce farm

income variability (Hennessy, 1998)

Risk aversion: modelling (static)• Primal models (Serra et al, 2006; Koundouri et al, 2009)• Dual models (Sckokai and Moro, 2006)

– Both type of models rely on max E(U(W)) (typically depending on two moments of the W distribution)

– Expected prices modelled as adaptive expectations

– Price and quantity indexes should be computed accounting for risk (Coyle, 2007)

Decoupling and risk (2)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Risk aversion: results– Available models have confirmed risk aversion

• Spain (Serra et al, 2008), Finland (Koundouri et al, 2009), Italy (Sckokai and Moro, 2006)

– The degree of risk aversion seems to decrease with farm size and with the shift from price support to direct payments

• Sckokai and Moro (2006) and Koundouri et al (2009)

– The wealth effect is small• US (Serra et al, 2006); EU (Sckokai and Moro, 2006)

– The insurance effect may be quite large when payments replace price support

• (Sckokai and Moro, 2006)

Decoupling and risk (3)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Risk aversion: problems– Just (2008) raised serious doubts on this

approach:• Models unable to identify risk preferences (attitude toward

risks) and risk perceptions (agents’ subjective probability)• Models would lose their normative value (type of

preferences) maintaining only a positive value (size of distortions)

– Models need to be refined, eventually integrating them with other approaches

• Calibration, technological information, experimental methods...

• Just (2009), Just and Peterson (2010), Zhengfei et al (2006), McIntosh et al (2007)

Decoupling and risk (4)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Theory– Decoupled payments may relax different

types of credit constraints• interest rates on long and short term loans• quantity constraints on amount of credits• bankruptcy risks

Modelling– Theoretical models (both static and

dynamic)• Ciaian and Swinnen (2006), Vercammen (2007)

– Empirical models (both structural and ad-hoc)

• Kumbhakar and Bokusheva (2009), Blancard et al (2006); Goodwin and Mishra (2005)

Decoupling and credit constraints (1)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Theory– Theoretical models predict a relevant impact of

payments in presence of credit constraints• credit constraints may increase land rents more than the

amount of the payments (Ciaian and Swinnen, 2006)• reduction in bankruptcy risk may increase investment

demand, especially by middle-sized farms (Vercammen, 2007)

– Both structural models and ad-hoc models find a significant impact of credit constraints

• Blancard et al (2006); Goodwin and Mishra (2005)

– Results are rather scarce and not conclusive • Goodwin and Mishra (2006) do not obtain the same results

on different years of the same data

Decoupling and credit constraints (2)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Theory (static model, risk neutrality)– Decoupled payments (linked to the

continuation of farm activity) may relax the standard exit condition p<AC(q*), that would become p<[AC(q*)-G/q*]

– The persistence of infra-marginal farms implies inefficiencies and slower restructuring

Results– US evidences seem to confirm persistence of

inefficient farms and slower structural change• Chau and De Gorter (2005); de Gorter et al. (2008), Key

and Roberts (2006)

– No EU studies available

Decoupling and exit decisions

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Theory (static model, risk neutrality)– Both US and EU decoupled payments are

linked to land. They should be fully capitalised in land rents/values (accruing to landowners!)

– The extent of this capitalisation depends on the price elasticity of land demand and on the substitutability between land/non-land inputs

Modelling– Structural max profit models deriving

determinants of land rents – Extensions of the traditional PVM– Ad-hoc regressions (identification problems)– Cointegration techniques

Decoupling and land values (1)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Results– Studies reviewed in Latruffe & Le Mouel (2009)– Degree of capitalisation of decoupled payments

around 80-90% (35-45% for coupled subsidies)• Likely linked to the requirements for obtaining payments (i.e.

cross-compliance, set-aside,…)

– These evidences are mainly related to the US• Roberts et al (2003), Lence and Mishra (2003), Goodwin et

al. (2003), Devadoss et al (2007) Mishra et al (2008)

– Very few EU studies available• Patton et al (2008); Latruffe et al. (2008)

– New studies needed, given relevance of national legislation and local market conditions

Decoupling and land values (2)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Theory (static model)– Decoupled payments should reduce on-farm

labour intensity and also off-farm labour allocation (less risk)

– Assuming additional non pecuniary benefits from on-farm labour, decoupled payments may generate substitution of on-farm for off-farm labour and lower wages (Roberts and Key, 2009)

Results– Negative impact on off-farm labour

confirmed (US studies)• Serra et al (2005), Ahern et al (2006), El Osta et al. (2008)

Decoupling and labour supply

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Theory (Dynamic model, risk aversion)– In presence of imperfect capital markets,

decoupled payments may stimulate farm investment, with a long term impact on output

– Accounting for risk aversion, the impact may be stronger (payments may affect income volatility)

Modelling– Structural dual model of decision making under

uncertainty (Sckokai and Moro, 2009)

– Reduced form of the same model, with three investment regimes and different adjustment costs (Serra et al, 2009)

Decoupling and investment (1)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Modelling (cont.d)– Extensions of the q-model and simpler 2-

period models extendable to the issue of decoupled payments

• Feinermann and Peerlings (2005); Huettel et al (2010)

Results– Clearly not conclusive

• Sckokai and Moro (2009) found a rather small investment and output effect of the SFP in a simulation on Italy

• Serra et al (2009) found rather large investment elasticity on Kansas farms, especially in the disinvestment regime

– More research needed in this area

Decoupling and investment (2)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Theory– If payments based on parameters that can be

updated (i.e. base acreage and yields of US payments), expectations may affect current choices

Modelling and results– Dynamic simulation models based on expected

utility function (with or without risk aversion), calibrated on actual farm/survey data

• Bhaskar and Beghin (2010) and Lagerkvist (2005)

– Main results: tendency to overinvest in land and to allocate more land (6.5%) to program crops

Decoupling and expectations on policy

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Possible improvements of FADN1. Quantities of variable inputs

• Relevant for analysis of cross-compliance/envirnoment

2. Household characteristics• Socio-demographic information and off-farm sources of

income/wealth

3. More details on investment/capital goods4. Longer permanence of farms in the sample

• Both relevant for dynamic models

5. More details on the downstream supply chain– Is there any communication channel with

FADN officials?

Empirical issues: data

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

General issues– Individual farm data take the form of

unbalanced rotating panels– Estimation often involves complex systems of

equations with censoringApproaches in the literature

– Most studies adopt classical econometrics– Alternative approaches (Bayesian and

Maximum Entropy) less popular, despite their claimed advantages (i.e. prior info, individual params)

– Panel data and censoring typically addressed with simplified approaches

Empirical issues: econometrics (1)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Recent developments– Advancements in estimation of systems of

equations on unbalanced panel data• Platoni et al (2010) developed two-way SUR

– Advancement in estimation of censored systems of equations (demand analysis)

• Shonkwiler and Yen (1999); Yen et al (2003); Yen (2005); Yen and Lin (2006 and 2008)

– Combination of the two issues not fully explored

– Results of adopting different techniques may be rather different

Empirical issues: econometrics (2)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

The available literature– Most literature based on case studies

analysed on individual farm data– EU studies mainly based on pre-SFP data – Less studies on the EU with respect to the

US and results not conclusive in many areas:• Risk studies to be refined• Studies on credit constraints, entry/exit, off-farm/on farm

labour and capitalisation in land values refer to the US (with a few exceptions)

• Studies on dynamic impact on investment reached diverging results

• Studies on policy expectations based only on stylised simulations

A research agenda (1)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Areas virtually unexplored (under the econometric/farm data approach)– Linkage between payments and non-land

input use (cross-compliance/environment)– Linkage between payment, redistribution

hypotheses (post-2013) and other impact channels (risk, entry/exit, labour, investment, land values)

– Impact of payments in the context of the food supply chain (i.e. value added accruing to agriculture, imperfect competition,....)

• First results show the bias of assuming perfect competition may be relevant (Soregaroli et al, 2010)

A research agenda (2)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Key methodological problems– Adoption of appropriate econometric

techniques (i.e. unbalanced panel data, censoring,...)

– Generalisation of results of case studies to the aggregate sector level

• Objective: bridge the gap between individual farm level results and large aggregate models used for policy simulations

• Plausible parameters should replace arbitrary “coupling factors”

• FADN weighting mechanism good starting point for rigorous generalisations

A research agenda (3)

agrir

egio

nie

urop

a

122nd EAAE Seminar, February 17th – 18th , 2011, Ancona (Italy)

Thanks for your attention!