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Impact of alternative implementations of the Agenda 2000 Mid Term Review

Impact of alternative implementations of the Agenda 2000 Mid Term Review. An application of SEPALE. Structure of the presentation. PMP Basic model description: SEPALE MTR MTR implementation in SEPALE Results Problems: optimisation Discussion. PMP. SEPALE: main characteristics.

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Impact of alternative implementations of the Agenda 2000 Mid Term Review

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  1. Impact of alternative implementations of the Agenda 2000 Mid Term Review An application of SEPALE

  2. Structure of the presentation • PMP • Basic model description: SEPALE • MTR • MTR implementation in SEPALE • Results • Problems: optimisation • Discussion

  3. PMP

  4. SEPALE: main characteristics • Belgian FADN data • Simultaneous optimisation of farm level profit functions • Simulation results can be aggregated according to the farm's localisation, type and size • Exchange between farms of land and quota • Constraints: • Land at regional level • Quota at farm and regional level • Animal feed through CES function • Solved with GAMS

  5. SEPALE: calibration of profit function P X + subsidies – Q/2 X² - H X Q and H are cost function parameters P: price X: production • 1st derivative to X is zero: MC = MR P = Q X + H • Total costs observed includingseeds, fertilizers, pesticides, contract work and land = Q/2 X² - H X • Two equations and two unknown parameters  parameters can be directly calculated • Constraint to prevent that total land use of the sample does not change

  6. MTR • single farm payment replaces the direct payments to activities • direct aid is linked to compliance with rules, called cross-compliance • Modulation: system of progressive reduction of direct payments: 5% in 2007 beyond 5000 euro per farm

  7. MTR in SEPALE: decoupling • The reference amount is divided over the reference area to assign the payment entitlement per ha for each farm • Area with eligible crops, all crops except potatoes and vegetables in open air, can activate the subsidy entitlements

  8. MTR in SEPALE: decoupling • Three situations could occur: 1. The same area of eligible crops as during the reference period: same direct payments 2. Increasing eligible area does not increase the amount of direct payments. 3. The amount of direct payments decline by a reduction of the eligible land

  9. MTR in SEPALE: decoupling • two farm level constraints should be added: Activated area ≤ Reference area Activated area ≤ Eligible area • The direct payments extend the profit function, as follows: Profit + activated area * reference amount

  10. MTR in SEPALE: modulation • Should be added during optimisation because farms can avoid reductions by transfers of direct payment entitlements • Two parameters controlled by policy: • Modulation threshold: amount free from reductions • Modulation percentage: percentage reduction

  11. MTR in SEPALE: transfers of entitlements • Can occur both with as without transfer of land. • Each member state can confiscate a certain percentage of the transferred entitlements. • Transfers with land: 10% of the entitlement can revert to the national reserve • Transfers without land: up to 30% can revert to the national reserve.

  12. MTR in SEPALE: transfers of entitlements • 7 constraints and 7 extra variables • Calculation of the amount of not activated entitlements • Calculation of the average value of not activated entitlements • Calculation of free eligible land per farm • Calculation of acquired land • Constraint to prevent transfers beyond the free eligible land • There should be more not activated entitlements than transferred entitlements • Complementary slackness constraint to prevent farms from being buyer and seller at the same time

  13. Impact analysis • 159 arable and cattle farms for which data were available for the year 2002 • Impact on supply and gross margin of: • Decoupling ratio • Modulation percentage • Modulation threshold • Transfers of direct payments?

  14. Decoupling – land use

  15. Decoupling – gross margin

  16. Modulation percentage – gross margin

  17. Modulation threshold – gross margin

  18. no progress at all in the solution process. the optimality criteria have not been satisfied ABS function Discontinuities Complementary slackness constraint multi-extremal decision models can be very difficult to solve, standard optimization strategies are not always sufficient Problem: numerical optimisation

  19. Conclusion + discussion SEPALE: individual farm-based sector model • Advantages: • to account for the individual farm structure • to simulate impact according to farm characteristics • to simulate transfers between farms • Disadvantages: • Limited data for calibration at farm level • More complex model structure

  20. Further research • Functional form • Environmental indicators • Demand side – link with other EU member states • Transaction costs • Risk

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