Decoupling of direct payments

1. Decoupling of direct payments Lecture 9. Economics of Food Markets Alan Matthews

2. Lecture outline • To provide an economic analysis of decoupling of direct payments • To review studies on the impact of the MTR both in the EU and Ireland

3. Impacts of decoupling • Many studies • Teagasc FAPRI-Ireland • OECD • Commission Impact studies • FAPRI-US • Dixon/Matthews (forthcoming) • We look at some results from the Dixon/Matthews study

4. Decoupled payments – conceptual overview • OECD dimensions (OECD, 2001) • Theoretical dimension – how do agricultural policies, including direct payments, potentially affect production and trade • Empirical dimension – what do we know about the actual production and trade impacts of different types of agricultural policies, including decoupled payments • Regulatory dimension - ‘best practice’ in the design of the most decoupled policies or policy practices, not least to be WTO compatible.

5. Decoupling - definitions • Full decoupling • policy is fully decoupled if it does not influence production decisions of farmers and if it permits free determination of market prices • Importantly, both the shape and the position of the supply and demand curves should not be changed • Effective full decoupling • Where policy results in a level of production and trade equal to that which would have occurred if the policy were not in place • Example would be a coupled payment combined with a quantitative restriction equal to the old production level

6. Although new policy (represented by S’) yields the same level of output initially, adjustment to a demand shock leads to a different output level than before Example of how the definitions differ

7. The degree of decoupling • Comparing the degree of decoupling requires a reference, usually taken as the output effect of market price support • From producer perspective, defined as 1 minus the ratio of the production effect of the policy package over the production effect of the equivalent (in PSE terms) price increase

8. Can decoupled payments affect production? Source: Baldwin June 2003 CAP Reform

9. Decoupled payments in an uncertain world • Where farmers are risk averse • Wealth effects: Change in farmer’s total wealth can affect his attitude to risk • Insurance effects: If policy reduces the total risk faced by the farmer (e.g. price stabilisation scheme) it will have positive effect on output

10. Decoupling in a dynamic world • Where there are capital market imperfections, any kind of income support – even decoupled – will be partially reinvested in agriculture • Where there are expectations of a future policy change and farmer can hope to influence this (e.g. change in base acreage for a payments scheme) decoupled scheme can affect production.

11. Decoupling: the effects • Output effects • By how much will output fall • Environmental benefits arise through more extensive production… • …but danger of land abandonment in marginal farming areas • Long term sustainability?

12. Source: OECD 2005 Decoupling – Policy Implications

14. Change in volume of output as result of MTR Source: Dixon and Matthews, forthcoming

15. Farm Incomes

16. Change in agricultural greenhouse gas emissions (CO2 equivalent)