They then compare the levels of production that are projected under the alternative assumptions of full and zero coupling with actual observed output values in Ireland over the period 2005-08. Based on this experiment, they conclude that farm operators to a large extent treat these payments as fully coupled, but that the supply-inducing effect is smaller than for the previously coupled payments.

There is considerable interest in the question of whether the EU Single Farm Payment is fully decoupled or not, not least because of the controversy over whether such Green Box payments under WTO disciplines are actually not or only minimally trade-distorting or not.

Until now, most of the research on the supply-inducing effects of decoupled payments has used US data, where decoupled payments were introduced in the 1996 Farm Bill, and researchers have arrived at very varied conclusions. The EU SFP differs in important respects from the US decoupled payments. There was a greater likelihood of base updating in the US while in the EU the GAEC requirement to keep land receiving payments in good agricultural and environmental condition probably inevitably implies some degree of coupling.

However, the SFP has only been in force since 2005 at the earliest. To date, we can only make inferences about the production effects of the SFP based on survey data, where farmers were asked about their production plans post-decoupling. These surveys (see Hennessy and Thorne, 2005; Colman and Harvey, 2004) showed that a significant number of farmers planned to use their decoupled payments to continue or expand non-viable production.

The results of the model simulations are shown in the table, where the projected changes in area (cereals) and suckler cows (numbers) under the zero coupling and full coupling scenarios are compared with the actual outcome over the period 2005-08.

It is evident that the level of grain area harvested and suckler cow numbers observed over this period is considerably above that projected when payments are assumed to have no effect on farmers’ production decisions, although somewhat below the levels projected when payments are assumed to be fully coupled. Their conclusion is that the Single Farm Payment maintains a strong effect on farm behaviour, even if lower than previous coupled direct payments.

The research design is a clever way of trying to identify the impact of decoupling payments while taking into account all the other influences (changing relative prices, changes in technology) which might affect production trends. The credibility of the results depends, of course, on the forecasting ability of the model and unfortunately we are not given any information on this.

The larger the forecast error of the model, the harder it becomes to assess the significance of the differences between observed and projected outcomes shown in the table. It would be interesting to run the model for the period up to 2001, for example, and then compare the projected results for the period 2001-04 with the production levels actually observed to give an indication of the likely size of this forecast error.

The authors stress that they are looking at short-run responses and point out that it is conceivable farmers might treat the payments as more decoupled over time. However, they also refer to the considerable body of literature which suggests that farmers do not necessarily behave rationally in the profit-maximising stereotype usually assumed in economic modelling, and that there can be a range of other factors that may influence farmer behaviour.

These potential influences include utility derived from being self-employed, prestige associated with land ownership, family circumstances, benefits accruing from social interaction with other farmers and aversion to change. In other words, farmers engage in agricultural production for non-economic as well as economic motivations, and economic modelling which fails to take this into account may well overestimate the extent of change to adverse economic shocks.

Speaking in 2005, Agriculture Commissioner Mariann Fischer Boel explained how she sees cross compliance in relation nearly 40 billion euros of public expenditure on payments to farmers:

“I would emphasise that decoupled payments are not “money for nothing”. To get the cheque in the post, a farmer has to respect a demanding range of standards related to the environment and animal welfare. We call this system “cross-compliance”.”

Today’s report by the Court shows that such a view is at best wishful thinking and at worst deliberately deceitful. Cross compliance does not represent a ‘demanding range of standards’ at all.

It should be stressed that this study is the biggest and most comprehensive to date. The Court says that it “carried out an audit in 2008 of the cross-compliance policy at the Commission and in seven Member States representing the diversity of agriculture across Europe”.

The top line conclusion pulls no punches:

“the objectives of this policy have not been defined in a specific, measurable, relevant, and realistic way, and that at farm level many obligations are still only for form’s sake and therefore have little chance of leading to the expected changes, whether reducing the size of payments or modifying farming practices.”

Senior officials at the Court are reported to be fuming at the suppression of the report until after the CAP health check was concluded. They should rest assured that their work has not been in vain: this report will play a big part in the discussions of the future of the CAP as part of the EU budget review.

Read the press release and the full report (60+ pages).

“The more specific you make the policy, the more room you give to bureaucrats who make the decisions. Non-targeted payments give more power to farmers.”

In case it’s not clear, Mr Gandalovic was making the case against targeted payments. In doing so, perhaps inadvertently, he touched on a question that goes to the very heart of the debate about the future of the CAP: the extent to which the CAP’s 54 billion euros of annual public expenditure should be targeted on clearly defined objectives and measurable outcomes. It is a debate raging right now within DG Agriculture, a power struggle that is pitting CAP ‘modernisers’ who seek a greater role for the current rural development pillar against CAP ‘consolidators’ who defend the “Fischler settlement” and the current Commission Health Check agenda. What it boils down to is a debate over the fundamental role of public policy in agriculture.

The modernisers favour a ‘programming approach’ that ties public money to definable public benefits and introduces quasi-contractual relationships between the state as purchaser and the farmer as service provider. In most cases the services to be provided are ‘environmental services’: preservation of biodiversity and wildlife habitats, action on water pollution, soil erosion and so on. This is the underlying ethos of EU rural development policy, although there are significant elements of the RDP that don’t quite meet the standard, the most obvious being Less Favoured Area payments. The modernisers see the old market intervention measures and direct payments (the single farm payment) as poorly targeted, both in terms of need (big, competitive farms get the most subsidy) and value for money (the link between subsidy payments and public goods provisions is, at best, weak).

The consolidators see things rather differently. They perceive that across the board, EU farmers lack competitiveness on world markets, in part because of the burden of meeting higher regulatory standards and having higher costs for land, labour and farm inputs. For this reason, the EU must step in and provide a blanket form of support to almost all farmers, approximately on the basis of their output. This ‘market correction’ will allow farmers in the EU to compete on a ‘level playing field’ internationally. For the support to be WTO-compliant it must be decoupled from production. This change was the most important part of the Fischler reforms agreed in 2003 and implemented with to varying degrees by member states. The fear expressed by consolidators, which is articulated in great length in the Scenar 2020 report, is that without a big cash injection, most European farmers would go out of business.

The limited ambition of the CAP Health Check proposals represent a victory for the consolidators, although the contours of the debate are visible in discussion of key health check elements such as the level of modulation, the introduction of payment limits and the potential of Article 68 measures which, depending on how they are drafted, could follow a programming-approach or resemble an old-style production subsidy.

It is unclear how long-lasting the consolidators’ victory will be. Those around Agriculture Commissioner Mariann Fischer Boel echo her line of ‘one vision, two steps’ with varying degrees of radicalism, inferring quite different notions of the shape of the CAP beyond 2013. For some senior members of her Cabinet, the single farm payment is just a transitory arrangement, as it had originally been intended when direct payments were first introduced in the 1990s. Broadly speaking there are a two alternative visions of the future: (1) a flat-rate per hectare payment for all European farmers or (2) a massive expansion of the rural development budget under the programming approach. Both involve major redistributions which present significant political challenges.

Some fear that without the current SFP (or its flat-rate successor) as a one-size-fits-all entitlement policy run from Brussels, DG Agri would likely face budget cuts, loss of prestige within the Commission and a diminished power to shape land management practices across the continent. They also fear that a programming approach implies greater flexibility for member state discretion, a CAP à la carte, partial renationalisation and the undermining of the single market. Some federalists of the old school are consolidators simply because the CAP is the policy area that has seen the highest level of European integration. For them, criticism of the CAP is critism of European project.

These then are the battle lines of the coming debate over the future the CAP in the EU budget review. What we see now is the phony war, the real action will wait until after the next European Parliament elections and the appointment of a new Commission with – it is widely assumed – a new Agriculture Commissioner.

A recent report for DG Agri has shed light on some of the transactions costs associated with the Single Farm Payment scheme in five EU member states – Denmark, France, Germany, Ireland and Italy. The countries were chosen to reflect different models of SFP implementation. The study sets out to measure the administrative burden on farmers of applying for the SFP. Not included are the administrative costs to the public authorities of running the scheme, nor costs incurred by farmers in meeting cross-compliance criteria. The costs involved are mainly those of time in understanding, completing and returning the forms as well as those for external assistance used to claim eligibility for the SFP.

[For this reason, it is misleading to claim, as is done in the Commission’s press release on the subject, that “The burden of red tape on farmers resulting from compulsory standards of environmental protection, public, animal and plant health and animal welfare (so-called Cross-Compliance) is very limited, according to a new report carried out for the European Commission.” The costs measured in this report are much more limited. The same misunderstanding appears in a recent speech by Commissioner Fischer Boel who claimed that the report "found that the administrative burdens which cross-compliance places on farmers are relatively light".]

The study reports that total administrative costs constitute between 3.0 and 9.3% of the total CAP payments received by the beneficiaries. In absolute terms, the cost per farmer varied between €110 in Italy to €1,300 in Germany. The low Italian figure is partly due to the small size of farm holding in Italy, and also because much of the cost is borne by publicly-funded extension centres which provide assistance to farmers on completing the forms.

While some of the differences in administrative costs across countries can be attributed to the differing complexities of the SFP implementation model chosen, the study finds that other factors such as the efficiency of public administration and the availability of, and ability to use, IT solutions are more important than the choice of SFP model in explaining these differences across countries. Simplification of the SFP scheme, as sought in the CAP Health Check, may well be desirable on a number of grounds, but on this evidence it is unlikely to have a great impact on the administrative burden perceived by farmers.

The study highlights that costs were higher in countries (France and Italy) where the SFP scheme was being implemented for the first time in 2006, the year of the study, compared to those countries which had already gained a year’s experience in its administration. It also noted that costs are likely to fall as farmers and their advisors gain familiarity with the scheme and as public administration becomes more efficient. It is thus not unreasonable to assume that the administrative cost will converge on a level equal to 2-3% of the value of payments.

The method used to measure administrative costs first identifies the amount of time spent by the farmer on the forms and then values this time by the average wage in the member state concerned and in the sector. On many smaller farms, the opportunity cost of the farmer’s time may be much lower than this, suggesting that the 2-3% figure may be an over-estimate. On the other hand, the cost to the public authorities of administering and monitoring the scheme should also be factored in which would tend to inflate the percentage figure.

On balance, the transactions costs of administered a direct payments scheme with a relatively unchanging base is shown to be modest, though not negligible. As the distortion costs associated with a (largely) decoupled direct payment scheme are also likely to be minimal (apart from the distortion costs associated with raising the taxation necessary to fund these payments), the study underlines that the transfer efficiency of direct payment schemes is high relative to other policy measures used in the CAP.

When the single farm payment was set up, farmers were given the right to trade subsidy entitlements between themselves which makes sense as it allows individual farmers to adjust their own businesses in the light of their assessment of market conditions. Farmers started trading among themselves, but the profitability brought in a wider range of investors. Open auctions are being held, while other investors are buying rights to subsidies over the telephone through brokers or on internet sites. You can find out more at WebbPaton’s website.

You have to be classified as a farmer to receive subsidies, but you only need hold a lease on a minimum of 1.7 acres for ten months of the year and never have to visit it. Scottish landowners are now renting out tracts of rocky highland for as little as £5 an acre per year.

The market that has developed does enable farmers to raise funds to retire or to invest in their business. But that could have been achieved by converting subsidies into a marketable interest bearing bond which is what many analysts advocated.

The Times and BBC Radio 4’s Today Programme reported on how a researcher from the Open Europe think tank attended a recent public auction of farm subsidy entitlements in Scotland and for £562.82 bought an entitlement that is worth £306 a year indefinitely. According to The Times, this is how it works:

Under EU regulations, only someone classified as a farmer can buy the right to receive subsidies, but to be classified officially as a farmer, people need only hold a lease on a minimum of 1.7 acres for ten months of the year, and never need to visit it.

Scottish landowners are now leasing out vast tracts of rocky highland for as little as £5 an acre a year, so that investors can claim to be farmers. For each acre you lease, you can buy annual subsidies averaging £100 an acre, but which can rise to over £1,000 an acre.

Spencer Hayes, of the agricultural broker Hayes McCubbin Macfarlane, estimates that about 200,000 acres of Scottish highland and woodland are being leased to non-farmers: “People are doing it massively. We have been leasing 100,000 acres simply to allow them to meet the European definition of farmer. The total market could be double that.”

Separately, The Herald reports the private trading of subsidy entitlements. The report explains it as follows:

The amount of SFP paid is unique to each farm as it is based on the subsidies that were historically paid to each business in selected years, called base years. Under Freedom of Information rules, the Scottish Executive publishes every farmer’s SFP on its website, and some run to several hundred thousand pounds. SFP entitlements can be traded freely amongst registered farmers and that has led to the development of a healthy trade, particularly from large farms and estates selling off low-value entitlements and replacing them with more lucrative ones that pay more per hectare.

A loophole has been created that also allows any investor to become classified officially as a farmer and then buy the right to be paid these valuable annual EU subsidies. Classification is achieved by purchasing a registered smallholding, and then the investor simply rents in additional “bare acres” at a nominal £6 per acre in a paper exercise that allows a legitimate claim on unlimited amounts of acquired SFP entitlements.

That has led to unease in some quarters. Andrew Arbuckle MSP, the LibDem deputy spokesman on rural affairs, is one such critic. He has calculated that £100m of the £420m annual SFP pay-out in Scotland now goes to non-active farmers.

Anthony Gibson, head of communications at the National Farmers Union, which speaks for British farmers, defended the arrangements in a letter to The Times the following day:

The EU Single Payment Scheme is not a subsidy; it is a payment made to farmers to reward them for keeping land in good agricultural and environmental condition, in the public interest. It is not linked to production, so as to free farmers to produce what the market wants, rather than what the politicians dictate. This is a thoroughly sensible reform, which will consign the butter and other EU food “mountains” to the history books and has vastly reduced the trade-distorting elements of the CAP.

Yes, the entitlements to receive single payments are tradeable, but only with an equivalent area of land, and the purchaser becomes responsible for meeting precisely the same environmental conditions as the original owner. The value of the entitlements on the market is largely determined by their face value, which cannot be increased, but which could be reduced. There is thus no scope for making windfall profits, for nonfarmers or farmers.

What Anthony Gibson fails to point out is that the Single Farm Payment looks much more like a subsidy than it looks like a payment for environmental services. For a start, the amount of SFP a farmer can claim is determined by the amount of farm subsidy he or she claimed during the ‘reference years’ of 2000-2002. There is no link between the amount of SFP paid and the amount of environmental services that the farmer provides. True, the SFP can be reduced if farmers fail to comply with the regulatory minimum levels of environmental protection and animal welfare. But how many farmers are actually seeing their SFP payments reduced for failure to comply? Here is what the Rural Payments Agency had to say on the issue as at October 2006:

“Cross compliance breaches resulting in reductions to Single Payment Scheme (SPS) payments to farmers in England. Just under 1,500 of the approximately 120,000 applications had a reduction applied as a result of not meeting one or more of the cross compliance conditions. Nearly 1,200 of these reductions were applied at the lowest rate (1%) allowed by the legislation, with over 90% the result of a failure to comply with the cattle identification requirements (particularly failure to report movement of animals, failure to return passports for dead animals).”

These seem rather low penalty figures, begging many questions. Either (1) most farmers are doing a brilliant job of meeting the new cross compliance environmental requirements, (2) the requirements are not very onerous, (3) there are not many inspections going on or (4) inspectors are turning a blind eye to breaches of cross compliance laws. I gather that the Institute for European Environment Policy are doing some work in this area, and I await the findings with interest.

Whatever is said in defense of the Single Farm Payment, what we are seeing is that increasingly less of the €48.5 billion paid in subsidies of one kind or another actually end up in the pockets of working farmers. And the money which does is concentrated in the hands of the very largest. The latest figures released by the European Commission show that across the 25 EU member states in 2005, 85% of the farm payments go to the top 18% of recipients.

The EU, US and Canada would all see exports decline by upwards of 40 per cent in the absence of Green Box payments, while Swiss and Japanese exports would fall by over 60 per cent. However, most developing countries would see exports increase by around 20 per cent.

The Green Box issue remains open within the suspended Doha Round negotiations. However, given the EU’s attachment to its decoupled Single Farm Payment system, the bulk of which falls into the Green Box, it is unlikely that any Doha Round settlement will lead to changes in the Green Box. However, there could be provision for further discussion of what can legitimately be placed in the box, putting a time bomb under the whole CAP.