A silly question, some might respond, for are not the EU’s direct payments decoupled (leaving aside the continued existence of a share of coupled payments) and thus not meant to have an effect on farm production? If a direct payment is truly decoupled, then moving payments from one farm to another, or from one country to another, will affect relative incomes but not output.

But there is widespread agreement that even decoupled direct payments do have an effect on production, even if there is less agreement on how strong this effect is in practice. There are now a number of studies which attempt to quantify these effects.

These include the yet-to-be-released Commission draft impact assessment of changes to the direct payments regime, as well as studies using the CAPRI and AGMEMOD models. The general message from these studies is that the production (and thus trade) effects are likely to be small, but that the distributional effects across and within countries could be significant.

Commission AIDS7K model

One approach is illustrated by the Commission’s farm income impact modelling using its AIDS7K model based on FADN data. Because this is a static model with no behavioural structure, it cannot directly calculate possible changes in the structure of production.

However, the Commission reports possible income changes by farm type. If the assumption is made that higher incomes on some farm types will be associated with increased production, and vice versa, then some inferences can be made on the likely direction of production changes.

As a general rule, a uniform flat rate would reduce support in more productive regions and sectors in favour of more marginal regions. In any move towards a flat-rate payment either between or within Member States, grazing livestock (beef and sheep) farms are the main beneficiaries (along with wine and horticultural farms). According to the Commission, moving to a uniform flat rate per hectare of potentially eligible area (PEA) across the EU as a whole (note that in the scenario it models farmers in several Member States continue to receive a limited amount of coupled direct payments (suckler cows, sheep and goat, cotton, Article 68, Posei)) would see farm net value added per Agricultural Work Unit increase by 10% on beef and sheep farms. Farm net value added would fall marginally on milk and arable farms.

(If account were taken of the greening component in Pillar 1, which means farmers must incur additional costs to become eligible for the payment, then the income gain to grazing livestock is reduced and the income losses on milk and arable farms but also pig and poultry farms are exacerbated).

AGMEMOD study

These production effects are more formally modelled in two well-known sector models AGMEMOD and CAPRI. In each case the results are, in part, determined by the modellers’ assumptions about how direct payments impact on production as well as by the policy scenarios that they assume.

The AGMEMOD 2020 combined model is an econometric, dynamic and partial equilibrium model representing each of the 27 Member States. Direct payments are incorporated as add-ons to the relevant producer price to form a reaction price (livestock, livestock products) or expected gross returns (crops).

Coefficients are applied to these add-ons to determine their production effect. For example, a coefficient of 1 would imply that farmers perceive direct payments as equivalent to a similar price increase, while a coefficient of 0 would imply that they treat them as totally decoupled.

The coefficients used in AGMEMOD vary across countries and commodities, for example, to reflect differences between the historic and regional SPS systems. For historical payments the coefficients vary between 0.3 and 0.6 and for regional payments between 0.1 and 0.5. The coefficients for coupled payments lie between 0.5 and 1.0.

Results of moving to a uniform flat-rate payment across the EU as a whole are reported in a recently-published AGMEMOD simulation [access to ScienceDirect required] for wheat, barley, maize, beef, pork and milk. Unfortunately, the consequences of moving to a uniform EU flat-rate payment are conflated with an overall reduction in the CAP budget for direct payments (by around 54% in the final year of implementation). Another important difference with the Commission analysis is that coupled payments are assumed to be decoupled in this analysis, which has particular consequences for the beef results. Despite these more severe assumptions, the production effects are estimated to be very marginal (ranging from 0% to -0.8% of commodity production in 2020) apart from beef where production is estimated to fall by -3.3%.

The AGMEMOD study does not report the expected commodity market price changes although these are presumably correspondingly small. AGMEMOD assumes exogenous world prices which are not affected by the EU net trade balance. To the extent that world prices respond to a reduction in EU production, then the AGMEMOD results, small as they are, also represent upper-bound estimates.

CAPRI study

A second study published by the EU’s Joint Research Centre uses the partial equilibrium CAPRI model together with a specially tailored farm group component called CAPRI farm type (CAPRI FT) to analyse the impact of a flat rate for direct payments at NUTS 1, MS and EU levels (with the level of redistribution and potential impacts increasing in moving to an EU flat rate). The farm models are behavioural programming models in which production and land use (but not farm structure) change in response to changes in relative profitability of different enterprises.

In the CAPRI model direct payments have an impact on production through their partial capitalisation in the returns to land. As direct payments change, so does the cost of land. Thus a reduction in direct payments will favour land-intensive production and vice versa. Land has an elastic supply curve in the model and, at the margin, is in competition with non-agricultural uses such as forest, recreation or nature reserve. So if direct payments fall sufficiently, land moves out of agricultural production and overall production will fall.

The study assumes that if land moves out of production the equivalent direct payment is lost and so overall expenditure on direct payments falls slightly in the scenarios modelled. The scenarios also assume that payments which are coupled in the baseline are decoupled in the scenarios, which will particularly affect beef and sheep as noted earlier.

This study also shows relatively small production and price impacts. In the EU flat rate scenario, which represents the most radical redistribution of direct payments, production generally falls (by -1.3% and -1.9% for cereals, by -1.7% and -0.8% for oilseeds, and by -0.6% and -0.2% for meat in the EU-15 and EU-10 respectively). The maximum price increase was for cereals of 1.5% for the EU-15 and 2.9% for the EU-10, while for meats prices are projected to increase by 1.1% in the EU-15 and 1.2% in the EU-10. The small magnitude of the impacts is due in part to the role of entitlements in limiting land use expansion while allowing for some substitution between grassland and arable land.

Given the small price and production changes, income effects are mainly driven by the redistribution of decoupled payments and to a lesser extent by land use changes. As regards farm types, large and medium size farms and dairies, mixed crops and livestock, general field and mixed cropping, olives, cereals and oilseeds and permanent crops are particularly negatively affected. Small farms tend to be less affected. On the other hand, the most extensive production systems, such as sheep, goats and grazing, the residual farm category and mixed livestock farms, realized higher premiums and incomes. These income changes correspond closely to those projected in the Commission’s AIDS47 model. They are aggregate changes, and there can also be redistribution within farm type groups with some farms gaining income and others losing. These distributional effects are analysed in detail in the study.

Conclusion

The Commission’s 2013 legislative proposals to be released next month will contain a number of measures likely to affect the level of EU domestic production and thus the impact of EU agricultural policy on third countries. The most significant will be the market measures confirming the elimination of milk and sugar quotas. But changes in the design of direct payments, including the overall budget for these payments, redistribution across farmers and member states, the introduction of the greening component, and the extent to which payments can be coupled or not, can also potentially have market effects.

Redistribution of direct payments (moving from the historic payment for entitlement payments to a regional flat-rate system in the EU-15 Member States plus Malta and Slovenia, and moving to greater convergence in the value of payment entitlements across Member States) will tend to shift payments from more productive to less productive Member States, and from more intensive to less intensive farms within Member States.

Redistribution of payments on its own would thus be expected to have a negative effect on EU production. Recent studies support this intuition but suggest that the effects will be very marginal, in most cases less than 1-2%. The effects are somewhat larger for cereals than for livestock but still rather small. Overall, therefore, the studies support the view that the EU’s direct payments are rather decoupled in practice.

In the impact assessment to be released with the legislative proposal the Commission has made some estimates of the cost of implementing these green measures. In this post, I examine these costs using information in the draft version of the impact assessment (Annex 12 Impact of Scenarios on the Distribution of Direct Payments and Farm Income).

This version was completed before June 2011 and the favoured proposal in the draft regulation now differs somewhat from the version examined in June. In particular, the obligation to maintain a green cover during winter has been dropped, but on the other hand the area to be setaside under the ecological focus requirement has been increased from 5% to 7% (see this post for a summary of the draft direct payments regulation).

The effect on farm income in 2020 of greening direct payments is determined by two factors. First, the implementation of the green measures increases the costs of farming either directly or in the form of loss in income. Second, various of the green measures (the requirement to maintain the 2014 level of permanent pasture, the requirement for crop diversification and, particularly, the ecological set-aside) will have an impact on supply and thus market prices. Thus, the greening leads to an increase of agricultural prices which tends to counterbalance the impact of the measures on cost.

The study concludes that the cost of greening will amount to €33/ha of potentially eligible area (PEA) in 2020. Just half of this figure is the cost of maintaining permanent grassland (€17/ha PEA). I have not been able to find any IACS figures on the size of the EU eligible area (if anyone knows where these can be found, please let me know). But the Commission estimates that the average direct payment will be €267 per ha PEA and, assuming a budget for direct payments of around €40 billion, this works out at a PEA of 151 million ha in 2020 (this compares to a utilised agricultural area of 178 million ha in EU-27 today). Using this figure, the cost of greening would amount to approximately €5 billion. This compares to the value of the green payment (30% of €40 bn) of around €12 billion.

Costs for the maintenance of permanent grassland and the ecological set-aside are in general the highest. For instance, among regions, the cost of maintaining permanent grassland in areas where an alternative use of land exists varies between €5 and €620/ha, with an EU average of €216/ha of grassland. With 5% of set-aside, the average cost per ha of land to be set-aside is €260/ha, but in some regions the costs per ha are more than €1,000. When the cost of greening is brought back to the total PEA, the amounts are lower. It is estimated that 29% of farms would have a cost between €15 and €30/ha of PEA, 4% would have a cost higher than € 200/ha of PEA, and about 21% of farms would not experience any cost.

In general, the costs are estimated to be highest in the Member States where maintaining large areas of permanent grassland is economically challenging due to pressure to substitute grassland by fodder crops (the Netherlands, Slovenia and Belgium).

It is interesting to speculate what is the value of the environmental benefit to be gained from incurring this cost? The Commission study cannot answer this question because of a lack of data on the environmental impact of the green measures. Instead, it quotes some figures on the land area likely to be affected by these measures.

Overall, for the EU-27, it estimates that 25% of the PEA will be affected. The risk of ploughing permanent grassland is reduced on about 13 million ha. On about 1.7 million ha of land, farmers receive incentives to cultivate alternative crops, mitigating the negative effects of monoculture, while about 3.6 million ha of arable land are set aside for ecological purposes. [It also estimated that an additional 20 million ha of arable land green cover is applied during winter time but, as noted above, this measure seems to have been dropped from the draft regulation].

But, in themselves, these figures do not give any insight into the size of the environmental benefits to be gained on these areas. Given this, it will be hard to answer the question posed at the beginning of this post whether incurring a €5 billion cost in this way is the most effective way of increasing the production of environmental public goods by farming.

Commission methodology

At a technical level, the credibility of the Commission estimates can be assessed by examining the methodology used. The Commission methodology is sophisticated and appears well suited to the task. My main criticism would be with the estimate of the cost of maintaining permanent pasture, which seems to me to be over-estimated. This is because the Commission methodology seems to assume that all permanent pasture that could be converted into arable cropland would be by 2020 in the status quo scenario. Its model does not have the capacity to estimate the proportion of permanent grassland that would actually be under threat in 2020, given the configuration of relative profitability (gross margins) between grazing livestock and other enterprises at that time.

The Commission’s analysis is carried out with FADN data at farm level using the AIDS7K model which covers 81,000 farms in 27 Member States. Expected prices and yield estimates in the scenario year 2020 are based on results taken from the Commission’s AGLINK-COSIMO model. Additionally, the labour input has been adjusted according to observed trends. The following steps are involved.

Crop diversification: This measure requires farms to cultivate at least 3 different crops, with no crop allowed to cover more than a 70% of the total arable land. It is assumed that the profitability of the additional crops corresponds to the average regional gross margin of field crop farms with diversified arable crops. Therefore, the costs are assumed to be equal to the difference between the farm’s individual gross margin of arable land and this average regional gross margin. In the cases where the farm individual gross margin is lower than this regional average it is assumed that there are no additional costs.

Ecological set aside: 5% of arable land has to be taken out of production. Costs for the implementation of the measure arise if the amount of fallow land on the farm is lower than the area to be set-aside. For each hectare to be additionally set aside it is assumed that the costs equal 2/3 of the farm individual gross margin of arable land. The idea is that farmers will set aside the less productive areas first (with the assumption that their gross margin is 2/3 of the farm average).

Preservation of grassland: Farmers have to maintain their permanent grassland. The cost of the implementation of this measure would be an opportunity cost. To estimate this cost, it was necessary to assess on each farm whether there is an opportunity to convert grassland to arable land or not and to quantify the magnitude of the opportunity cost.

There will be little or no opportunity to convert grassland in farms with poor soil quality. For the simulation it is assumed that this is the case on farms with a low share of arable land (less than 5%) and on farms where sheep and goats represent more than 70% of grazing livestock units. Furthermore, it is assumed that rough grazing and 10% of the remaining permanent pastures cannot be converted.

For the remaining permanent pasture it is assumed that the opportunity costs are 2/3 of the difference in gross margins between permanent grassland based dairy and beef production systems and alternative systems at regional level. Only a fraction of the difference is kept in order to take into account that the newly converted grassland would probably not have the same level of productivity as land already in fodder crops (the most productive areas have been converted into arable crops before).

For the calculation of the difference in gross margins at regional level, it is considered that there are no opportunity costs in regions where permanent grassland is not relevant or where there is no alternative identified (no cattle production). Otherwise, in regions where grass-based and forage crops based feeding systems co-exist in specialised farms, it is assumed that the first alternative to cattle production based on grass is to intensify production adapting the feeding system by ploughing the grassland to produce forage crops. Finally, in the remaining regions, where cattle production takes place in mixed cropping-livestock farms, the farm gross margins per hectare of utilised agricultural area in mixed and specialised cropping farms are used.

Green cover: I include this because it is included in the draft Commission study even if it appears to have been dropped from the draft legislative proposal. During winter, farms have to apply green cover on 70% of their arable land and the area covered by permanent crops, excluding the area of ecological set-aside The costs of the implementation of green cover are estimated based on assumptions on the affected area and the costs per ha. As there is no information on green cover available at farm level several assumptions had to be made: first, it was assumed that a large part of the area covered by cereals is covered during the winter, as in most cases a large share of the cereals are winter crops. As in the FADN it is not differentiated between winter and summer crops it was assumed that on each farm the share is equal to the national shares of winter and summer varieties published by EUROSTAT. Furthermore, it was assumed that 30% of the area of permanent crops is already covered. The costs per ha of land to be additionally covered in order to meet the requirement are assumed to be equal to 50€.

Market effects: These gross costs of implementing the green measures are the appropriate measure to compare with the value of the environmental benefits to be achieved. However, in terms of the impact on farm income, these gross costs will be offset by a transfer from consumers through higher commodity prices. These are reported in the Commission study by farm type rather than by commodity. The income effect over all farms is reported to be an increase of +0.6%, with more positive effects on crop farms (2.6%) and grazing drystock farms (+1.2%), while enterprises using grain as a feed are worse off (income on milk farms would fall -0.2% and on pig/poultry farms by -8.4%).

Overall, farm income falls by -2.8% on average in the Integration scenario (which includes the greening option, but also includes the effect of capping, where the money saved by capping and diverted to rural development is assumed lost to farmers). It seems that the positive impact of the market effects from reduced supply do not compensate farmers for the increased cost of implementing green measures in Pillar 1.

Overall, these results are probably quite a good guide to the likely outcomes of the proposals in the draft legislative proposal because, although the green cover requirement is removed (thus reducing costs), the ecological focus area requirement is increased from 5% to 7% (thus raising costs).

Photo downloaded from http://www.flickr.com/photos/13847552@N03/3906560447/ under Creative Commons licence

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.