One of the most contentious issues surrounding farm subsidies is how much of what is paid out actually finds its way into the pocket of the farmer, and how much leaks out into rents paid to landlords, prices charged by the companies selling seed, feed, machines, chemical fertilizers, pesticides and other inputs.
At a dinner I attended in Brussels last week with a small group of CAP reformers, former EU Agriculture Commissioner Franz Fischler shared his experiences of the politics of reform. One of the most interesting things he had to say concerned a study by the OECD showing that barely 25 per cent of traditional production-linked subsidies actually went to farmers. He said this study had been invaluable as he traveled around Europe trying to convince European farmers to embrace his proposals for decoupling farm payments. But a recent clutch of academic studies is confirming the anecdotal evidence that decoupled farm payments are just as leaky as old style production subsidies they replaced.
A new study of land prices and rents in Germany and the United States by by Harald von Witzke, Steffen Noleppa, and P. Lynn Kennedy shows that the problem of land value capitalization is still very much with us in the new era of decoupling. They find that of every euro in subsidy paid to German farmers, two-thirds is passed on to the landowners and conclude that:
The operator is the intended beneficiary of agricultural subsidies in the European Union; however, as we have found, the main beneficiary is the landowner. Therefore, agricultural subsidies must be considered instruments that are poorly targeted to the intended beneficiaries. In fact, the shocking reality is that land rents in the absence of EU farm subsidies would be negative in most of Germany.
This conclusion is consistent with other recent studies into the impact of decoupled farm payments on land values, such as this study by Arathi Bhaskar and John C. Beghin at Iowa State University and this study by Stefan Kilian and Klaus Salhofer at Technische Universität München.
The implications are of even greater concern given the high and rising share of farm land that is rented and not farmed by the owner. The current subsidy-driven rush to biofuels can only make things worse.