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Production effects of agri-environmental programmes

EU agri-environmental policy dates back to the mid-1980s and became a mandatory part of the EU agricultural policy toolkit in 1992. Initial implementation in many Member States emphasised policies designed to mitigate the environmental harm associated with agricultural intensification (e.g. by paying farmers to lower fertiliser inputs) but over time and under Commission prodding the objectives have shifted more to environmental enhancement.

Around two-thirds of EU agri-environmental programme payments are classified in the OECD’s Producer Support Measure (PSE) calculations as ‘payments based on input constraints’. Such programmes would be expected to reduce EU production. Empirical attempts to measure the impact of the CAP on EU production and world market prices generally ignore their production-restraining impact and thus tend to over-estimate the world market effects of EU agricultural policy.

Salhofer and Streicher in a 2005 paper noted that the production effect of an agri-environmental programme depends on two things. The first concerns the specific conditions related to production methods or inputs that have to be fulfilled and the extent to which these conditions actually constrain production. Because participation in agri-environment programs is voluntary, there is a self-selection bias in that the most likely participants are those farmers who have no make either no or minimal changes to their farming practices. One cannot therefore just compare yields of farmer participants and non-participants in agri-environment programmes in order to measure their production effect, because the two sets of farmers will be drawn from two very different groups.

Offsetting the production limitations is the fact that additional payments received by a farmer, even though not directly connected to production, can still influence production by having an effect on the decision to continue in farming (cross-subsidization), on labor allocation, on investment decisions, and on risk perception.

Thus the impact of EU agri-environment payments on production is an empirical issue. Salhofer and Streicher examined the impact of Austrian schemes by exploiting the fact that they had two years of observations before the introduction of agri-environmental programmes (1993, 1994) and two years with the programmes in place (1997, 1998) to control for the self-selection bias. They found that participation in the more ambitious agri-environmental programmes (such as organic farming or extensive grain cultivation) had a significant negative effect on yields. However, for other programmes with lesser obligations although participation had a negative effect on yields the effect was not statistically significant.

Since that study there is further evidence that agri-environment programmes do lower yields and production in certain circumstances. Osterburg (2005) using a sample of German farms showed that cereal yields of participants in agri-environmental schemes increased less than the cereal yields of non-participants. Finger (2010) observed that cereal yields in Switzerland levelled off after 1992 following agricultural policy reforms in 1992 that introduced ecological direct payments for extensive cereal production and led to major changes in production patterns. Peltonen-Sainio et al. (2009) attribute a similar effect for Finish cereal yields to the adoption of an environmental program that aimed to reduce the environmental load of agriculture as well as to decreasing crop prices after EU accession.

Agri-environment programmes are not the only way in which EU agricultural production has been kept below its potential. Arable set-aside, milk and sugar quotas, ceilings on coupled direct payments and livestock extensification payments are other instruments that have been used for this purpose in the past. Few empirical studies took these instruments into account when modelling the impact of EU agricultural policies prior to the introduction of decoupling. These studies overestimated the impact of these policies on EU production and world markets as a result. This is not a defence of EU agricultural protectionism, but it suggests caution in making claims about the size of the potential gains, for example, for developing countries, from further CAP reform. Another implication is that encouraging EU farmers to produce more environmental public goods is likely to conflict with the aim of increasing EU agricultural production which is often advocated (mistakenly) on food security grounds.

Finger, R., Evidence of slowing yield growth – The example of Swiss cereal yields, Food Policy 35, 175-182, 2010.
Osterburg, B., Assessing long-term impacts of agri-environmental measures in Germany. In: OECD (Ed.), Evaluating Agri-environmental Policies: Design, Practice and Results, OECD Publishing, Paris, pp. 187–205, 2005.
Peltonen-Sainio, P., Jauhiainen, L., Laurila, I.P., Cereal yield trends in northern European conditions: changes in yield potential and its realization. Field Crops Research 110 (1), 85–90, 2009.
Salhofer , K. and Streicher, G., Production Effects of Agri-environmental “Green Box” Payments: Empirical Results from the EU, Paper presented at the 11th Congress of the European Association of Agricultural Economists, Copenhagen, Denmark: August 24-27, 2005.

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