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Crystal ball gazing: Scenar II study on the effects of CAP reform

A new economic modelling study commissioned by DG Agriculture shows that many of the core claims made for the CAP are highly misleading, or downright wrong. The Scenar 2020 II study shows that if the subsidies, tariffs, intervention prices and quotas of the CAP were abolished and replaced with a free market, European overall agri-food production would be almost unchanged. This finding directly contradicts the argument that the CAP is an essential policy for ensuring that Europe remains a global agricultural powerhouse and ensuring European citizens have access to a reliable supply of affordable food.

The big picture message is that farming is subject to a range of economic, technological and demographic pressures that far outweigh the effects of agriculture policy, athough there are some exceptions. The economic story of farming over the past half century is of productivity increases (due higher yield varieties of crops & different farm management practices), declining employment (due to mechanisation) and a relative loss of income in agriculture compared to other parts of the economy.

The study predicts that the the European agri-food sector will see a 4 per cent increase in production between 2007 and 2020 if the current policy trajectory is maintained (including a cut in direct payments and an increase in rural development spending). Scrapping the CAP would reduce the increase to 3 per cent over the same period.

Looking beyond the aggregate production levels, the study finds that the effect of liberalisation would be to concentrate food production in regions that are best-suited to farming. More marginal areas (e.g. cold, arid, remote and mountainous regions) would be farmed more extensively, and in some places land would be taken out of production altogether. The study predicts full liberalisation would see a 6 per cent fall in land area devoted to farming, with the current policy resulting in a fall of around 1 per cent.

The likely intensification of production in the places best suited to farming shows the need for effective regulatory policies to reduce the harm that has been observed in the past, such as the leaching of chemical fertlisers and manure into rivers and seas, soil eroision, the unsustainable use of water, the destruction of wildlife habitats and the reduction in natural species caused by pesticides and herbicides.

Scenar 2020 II thus shows that the CAP is not a food security policy but a policy which maintains farmland prices at 30 per cent above their rightful level and bolstering agricultural wages by a much smaller amount. The policy also maintains some farming activity in remote and unfavourable areas where it is not economically viable without public support. It is overwhelmingly a redistributional policy – transferring benefits from one section of society to another.

Looking at different farm sectors, the study finds that the EU’s tariffs (and to a much lesser extent direct aid subsidies) ensure European beef, dairy and sugar production at greater levels than they would be in an open market, which would see a much greater share of European consumption met by imports from overseas. The study finds that scrapping the CAP would mean EU beef production would fall from 8 million tonnes in 2005 to 5 million tonnes in 2020. If more or less the current CAP were maintained the fall in beef production over the same period (as a result of macro factors unrelated to policy) would be less than a third of this. The fall in production would be greater in the EU-15 than the NMS, where beef production is much less anyway. The study also singles out dairy and sugar production as the two other sectors most sensitive to changes in the levels of border protection (and to a lesser extent, subsidies).

For dairy, the study shows that under the current CAP, dairy production is on course to increase by around 5 per cent, driven entirely by positive macroeconomic factors such as the growing world economy and changing diets in developing countries. Without the CAP, the increase would be less, just under 2 per cent. In a more open market, a decrease in EU beef production would be partially offset by an increase in pork production.

For cereals, the story is rather different. The study predicts that cereals output will increase with or without the CAP, and the effect of the CAP on cereals production is rather small. It also suggests that the area under cereals cultivation will fall slightly, suggesting that production gains are the result of intensification and better yields rather than putting more land to the plough.

The study shows that without the CAP, food prices paid by European shoppers would fall on account of increased imports from overseas and the competitive pressure on EU producers. If shoppers would gain from scrapping the CAP, the study offers some reveailing insights on who would stand to lose.

It finds that without the CAP, European land prices would fall by nearly 30 per cent. As Valentin Zarhnt argues in his post on the same report,

“This is nothing the public need worry about – but it explains the heavy lobbying of landowners for the preservation of a ‘strong’ CAP.”

As the chart below shows, the study predicts that scrapping the CAP would hit agricultural wages, though the impact would be less than the impact already mentioned on land prices.

For years farm incomes have been falling behind wages in the rest of the economy, and according to the study, without the CAP agricultural wages would fall further behind.

The study finds that many will see no alternative to accepting lower wages as it is difficult to find jobs outside agriculture. This speaks to the need for more imaginative policy interventions to offer alternatives to regions that are especially dependent on declining agricultural economies.

The study was carreid out by ECNC-European Centre for Nature Conservation, Landbouw-Economisch Instituut (LEI) and Leibniz-Zentrum für Agrarlandschaftsforschung e.V. (ZALF). It will provide interesting reading for DG Agriculture’s in-house sage Tassos Haniotis (artists impression, right, with turban and fake beard). Read the study in full, it’s well worth it:

Scenar 2020 II.

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3 Responses to “Crystal ball gazing: Scenar II study on the effects of CAP reform”

  1. Jean Christophe Bureau →
    March 23, 2010 at 08:28 #

    Believing that Scenar 2020 study convincingly supports the idea that payments inflate land values by 30% is simply ridiculous. It is not a criticism of the Scenar study, which uses some decent models perhaps the best ones available (GTAP, ESIM, CAPRI) for a difficult exercise. But the last thing to do is measure this kind of capitalization into asset values using a model (especially GTAP) where the result is 100% driven by the modeling assumption. For years, the GTAP model has been constructed in a way that assumed an almost complete capitalization of payments in asset values. It was actually a major weakness of the model (as shown by A. Gohin in a IATRC paper that left little confidence in the modelling of decoupled payments in GTAP). Now the model is used to “show” that payments capitalize in land prices! this is going in circle…. Basically, this is like: “I use assumption A to construct the model. The model gives me a result that supports assumption A. Therefore assumption A is true”. I wondered what Bachelard and Popper would say about such a scientific evidence.

    In a past American Ag Econ Assn conference in Baltimore (1992 I guess) the late Bruce Gardner provided many examples of agricultural economists who used data to support ideas that were already behind the construction of the data (for example, he pointed out a study on US dairy prices where the authors had run an ARIMA model to look at seasonality, ignoring that the USDA monthly series had already been constructed using an ARIMA model and annual data, I still remember the laughs in the audience). His message was that one should look at what is behind the modeling before drawing idiotic conclusions. It should be remembered.

    This relates to a second post, by Wyn Grant, regarding Stephan Tangerman’s paper in AgraEurope. I have not read Stephan’s paper yet (for some reason AgraEurope arrives in my mail something like two weeks after its release, this weekly letter is not only scandalously overpriced but also too late to be useful). But apparently Stephan also thinks that payments capitalize into land values. This is frequently claimed by a number of economists who tend to overlook the data (this idea is central to a SIEPS document for example by Ewa Rabinowicz and her collegues for example). My opinion is that this assumption is simply not supported by data in many European countries, as one can easily see by calculated net present value of future payments and compare it to the price of land. Or simply compare land prices sold with and without entitlements (most of the time the difference correspond to one year of SFP in the few countries I have looked at, far from a infinite capitalization of discounted flow).

    Payments and land values are a complex issue, as Alan Matthews said in an earlier post on this issue, but the Scenar 2020 exercise does not add any compelling element of proof.

  2. Jack Thurston →
    March 23, 2010 at 09:12 #

    @Jean-Christophe: I defer to you on the modelling assumptions at play here, but to be fair on Scenar, it is a study which is looking at the effect of the CAP in the round, i.e. including border protection. And here the evidence must be clearer that certain tariffs boost production inside the EU, increase prices and therefore must have a positive impact on land prices.

    With regard to direct payments, isn’t there some anecdotal evidence from the new member states on the effect of the introduction of payments on land prices? We have seen see land prices (and farm incomes) going up in these countries far faster than market fundamentals might imply. Surely there is an effect of a new expectation that those owning farmland will be getting a cheque from Brussels each year, not only that but a larger cheque each year as direct payments scale up towards parity with the EU15?

    At the Agra Europe Outlook conference last week I was on a panel with Peter Kendall, President of the UK National Farmers Union who was complaining about how the single farm payment on the regional model is being incorporated into land rents and that the main beneficiaries are landowners, not working farmers.

  3. Valentin Zahrnt
    March 24, 2010 at 10:47 #

    The Swinnen et al. book on land markets in the EU takes a more empirical look at capitalization into land values. It finds very diverse results for different member states.
    See for a summary: http://www.reformthecap.eu/blog/land-markets

    But some model that combines the effects of different policies (incl. tariffs and biofuels) is still useful to show the overall effect of policy intervention vs ‘liberalization’ on land values.