Moving towards a flat rate farm payment?

It is sometimes said that the Common Agricultural Policy establishes a level playing field across Europe, allowing farmers to take part in the European single market without fears about a plethora of national subsidies distorting prices, giving some a helping hand and holding others back. If only it were true. The fact is that when it comes to the biggest ticket item in the CAP, the €36 billion in direct payments (the decoupled single payment scheme plus various commodity-linked direct payments), the CAP is far from being a common agricultural policy.

I have calculated the average direct payment per hectare of land, based on budget ceilings for 2008 and corrected to 2014 levels, which is the point at which the new member states that joined the EU in 2004 achieve parity with the old EU-15. The results are presented in the chart below.

Average direct payment per hectare (2014) -

It is clear that the variation is enormous, from an average of almost €600 per hectare in Greece, to a mere €80 per hectare in Latvia. In general the older member states do much better than the new member states. Payments per hectare fluctuate widely across farms in the EU, and within countries. The Times reported on a plot of land in the UK for which the owner was claiming €40,000 per hectare. Direct payment entitlements are strongly positively correlated with the productivity of farmland as they depend on (past) crop yields and livestock herd stocking densities. Farmers who farm the most fertile lands are getting the highest payments per hectare. A distribution of state support which favours farmers in advantaged areas over those in disadvantaged areas is hard to justify from an equity standpoint.

So what should be done? Anyone who has been reading the runes of the current debate on the future of the CAP will be well aware that an EU-wide flat rate payment is firmly on the agenda. Senior officials close to Agriculture Commissioner Mariann Fischer Boel are thought to favour it. Allan Buckwell, one of the most interesting thinkers on European agriculture policy, has suggested it. Writing this month in Agra Europe, Neil Parish MEP, outgoing chairman of the Parliament’s committee on Agriculture and Rural Development made a similar point:

“by 2013, some new member states will be receiving less than half of what the old states will be getting, in terms of aid per hectare. They will therefore push for a per hectare payment that is equal across the EU, thus reducing the payments in the old member states. My view is that if we are to have a reasonably fair EU, there has to be some equality in payments”.

Taking the entire direct payment budget and dividing it equally across all EU farm land would end up with a flat rate payment of €229 per hectare, by my calculations. For some farmers this would represent a sizeable boost to their subsidy income, for others a big cut. The graph below shows average increases or decreases, by member state.

Losses and gains from moving to a flat rate payment of €229 per hectare -

It is evident that there are more countries (and larger countries) that lose, suggesting that any move of this kind would have to overcome considerable political opposition. It is possible that the loser countries would be partially compensated by increases in their entitlement to rural development funds. These funds also vary wildly on a per hectare basis. The chart below shows per hectare EU budget contributions to member state rural development policies, based on calculations of annual RD spending in the period 2007-13 by the Institute for European Environment Policy.

EU budget contribution to rural development programmes - http://sheet.zoho.comMalta is omitted from the graph because it is an extreme outlier with €1100 per hectare.

It is clear that the countries which do very well out of direct payments do less well from rural development policies, so there could be some equalisation here, although it is hard to see where the money will come from. It is also worth remembering that the political constituency for direct payments is very powerful and well mobilised while there is barely any political constituency for increased funding for rural development policies, aside from a handful of environmental NGOs such as Birdlife International. Under current CAP financing rules, cofinancing is required for all EU budget contributions to rural development policies, which means that national governments have to pay something into the pot. By contrast, direct payments are ‘free money from Brussels’.

If a flat rate payment across the EU is too radical, then how about introducing a limit on payments per hectare across the EU? This could be set at around €350 or thereabouts. Such a limit would deal with some of the most extreme cases in which the CAP serves only to make the rich richer, following very much the principle set out in the Gospel According to St Matthew (13:12):

“For whosoever hath, to him shall be given, and he shall have abundance: but whosoever hath not, from him shall be taken away even that which he hath.”

A per hectare payment limit should be in addition to overall payment limits by individual, which I believe should be based upon some measure of household income, not on the absolute size of payments, as is currently proposed. Over the next six months, member states will be required to publish details of individualr recipients of direct payments. Transparency is only going to highlight further the glaring inequalities of the CAP.

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3 Replies to “Moving towards a flat rate farm payment?”

  1. What is the economic effect of decoupled payments? In the “15” they prevented a slide in land values that would have occurred if the June 2003 CAP refrom had limited itself to price cuts. For the other Member States (ie those from 2004 onwards) who suffered no price cut their economic effect on land prices is different – it boosts land values. This reasoning is valid also for candidate countries.
    Higher land prices tend to make restructuring more difficult yet restructuring is needed if farming in new MS (and CCs) is to be more competitive.
    By all means grant significant budget transfers to new MS but do so via means that give rise to durable improvements in their economies, including the rural sections. The grant of decoupled payments, at whatever intensity, will not contribute to this end. Moreover decoupled payments have no effect on land use thus the option of making them “even” across the Eu would have no benefits in terms of competition.

  2. Alan, thanks for your comment which raises a number of important issues.

    The economic effect of decoupled payments is difficult to assess. In many ways the EU speaks with forked tongue on this. At the WTO it says decoupled payments are ‘green box’, i.e. non-trade distorting. But in internal debates in Brussels, people get very agitated over the effect of changing rates of decoupled payments, for instance via voluntary modulation, on the ‘level playing field’ for EU farmers. I don’t think that it’s possible to have it both ways. Either it’s non-trade distorting or not. I suspect that there is a WTO complaint against EU decoupled payments in preparation which will shed more light on this through the dispute settlement process.

    What I heard when I was in Poland recently was that people felt the advantage of decoupled payments was that they are a relatively unbureaucratic way to get a lot of money into the hands of farmers, and that Polish farmers were in desperate need of money for investment in their farm holdings, having been starved of investment for decades. Whether this infusing of cash is just eaten up in higher land values is hard to tell. I would imagine that some of it is, but probably not all of it. Having said that, the money would almost certainly be better spent on broader rural development objectives, such as road improvments, training and skills.

  3. Maintain the CAP national budgets or

    EU flat rate or

    EU SPS flat rate plus
    EU SPS VNZ payment plus
    EU SPS Bird and Habitats Directives plus ….

    Those are the options…..

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