Who cares about capping?

According to the latest proposals of the European Commission, the amount of support from the basic payment scheme received per farm would be limited to €300,000 per year. Payments higher than €150,000 will be subject to progressive reductions but the costs of salaries in the previous year can be deducted before these reductions apply.

Several critiques appear regarding capping. As recognised by many, it would further weaken the anyway decreasing competitiveness of European large farms by creating a discriminative instrument in the provision of direct payments. It is also contradictory to the economies of scale (and efficiency) as well as would significantly increase bureaucracy, which is totally against the ‘cutting the red-tape’ principle of the Commission. Moreover, it might also result in a splitting of farms, which would have serious consequences to the European agricultural sector and would not be ethically fair either. Another rather theoretical reasoning state that direct payments serve as a remuneration for the production of public goods, produced on small farms and large farms alike, meaning that capping is against the equal production of public goods. Furthermore, large farms can find many ways of evading capping (e.g. splitting, employment tricks, etc.).

However, as the other side of the coin suggests, it would help defending the public image of the CAP in the eyes of European taxpayers stating that large farms do not need any further help. It would also enable further targeting of direct payments and decrease the currently inefficient distribution of these payments. It would also slightly assist in job creation if large farms want to avoid capping and would have some beneficial effects in ‘whitening’ national labour markets.

Apart from all these pros and cons, one should clearly see that according to the Impact Assessment of the EC, we are talking about an €278 million to € 835 million issue here for the whole EU27. This represents 1-2% of the total amount of direct payments at EU level which is relatively low when compared to the current amount resulting from modulation (around €3 billions for 2013). The logical question comes: who cares capping at all?

This question might generate two different actions. On the one hand, one may conclude that we should get rid of this idea as it has no significant effects for the future. On the other hand, decision makers might conclude that it should be introduced anyway as it has no major effects and therefore does not harm anyone seriously but would serve as a good tool to sell the CAP in a new dress. In times of weak reforms, the latter argument seems very much plausible.

This post was written by Attila Jambor.

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5 Responses to “Who cares about capping?”

  1. Simon Ward
    March 14, 2012 at 08:24 #

    It is a delight to see the arguments for and against listed clearly. However, there are other arguments. The subsidy per unit area is the same for all farmers in England (in the 3 areas) and it is the larger farm that has most employees. These employees are the most vulnerable to cuts. Neither the subsidy nor income from the sale of wheat goes directly into the farmer’s pocket but contributes to the costs of the business.

    Furthermore, at least in the UK, it is the smaller farmer that abuses the system by operating in many cases an inefficient business while carrying out other activity expecting the EU to support the claimant’s hobby. I am one of these. Large farmers in England, even where the farms are part of a larger enterprise such as the co-op,run commercial farming operations and make a serious contribution to the environment and food supply. If we were serious about reform and justifying payment to the tax-payer we would gradually increase the minimum farm size eligible for subsidy and simultaneously reduce the payment per unit area. This would save more money than capping and leave the industry in a healthier position than the imposition of capping which actively discourages expansion and increases subsidy reliance.

    Ultimately some of the largest recipients of subsidy are landowners who receive the benefit of the subsidy via the rent paid by smaller or larger farms – we don’t know which.

  2. Jack Thurston →
    March 14, 2012 at 10:36 #

    One of the reasons why the impact of the proposed capping will be so small is that farm business can set off certain costs against the calculation of the total amount of subsidy subject to capping, for instance its wage and social security bill, for example. This is intended to deal with the concern that Simon raises about the impact on employees. Thus if a farm business receives 250,000 euros in subsidy but its wage bill is 100,000 euros or more, it will not be affected by capping.

    Moreover, the 30 per cent of pillar one payments which are for ‘greening’ measures are exempt from capping.

    Even if the capping proposal is introduced we will continue to see very large payments going to very wealthy individuals and profitable businesses and this will continue to be problematic in presentational terms.

    If the CAP is to continue providing income support to hard-pressed farmers, then surely the way to avoid paying income support to rich people is to ensure that:

    1. Only active farmers get the money, not ‘slipper farmers’ or ‘sofa farmers’

    and

    2. All income support is means tested, like most other welfare payments, based on total household income.

    The more fundamental question is why the EU should be in the business of running a parallel social security system for a small sector of society at all.

  3. Peter Fane
    March 14, 2012 at 13:11 #

    Capping.

    Interesting to see reference to the argument that “direct payments serve as a remuneration for the production of public goods, produced on small farms and large farms alike, meaning that capping is against the equal production of public goods”.

    That argument does not really hold water even at present. Pillar 2 is the mechanism for securing the delivery of public goods, direct payments under pillar 1 can only be said to deliver public goods to the extent that cross compliance secures additional benefits – whereas in practice it mostly just ensures that existing legislation is enforced more effectively.

    The basic payments will not be able to be justified on the basis of public goods at all once the greening payment has been separated out. Then it will be clear to all that basic payments are for one purpose only – income support, as stated in the Regulation. That will make it increasingly hard in the future to defend payments to larger farmers.

    The capping may only be a applied to a small proportion of the payments at this stage, but once it is in place, there will be much pressure to reduce the thresholds. Indeed, there is reason to doubt even in these reforms whether the deductions of salaries can be made to hold water, if during the negotiations this provision is commuted for a higher threshold then a much larger proportion of farmers could be affected.

  4. Attila Jambor
    March 14, 2012 at 13:56 #

    One of the basic questions here is whether we want the CAP to be equal or efficient. If we want it to be equal then size should not matter and large as well as small farms should receive these payments. If we want it to be efficient, then I agree that a more rigorous capping is needed on the one hand, while a minimum threshold is also needed on the other. It is always a political decision to move these thresholds in the future but the logic of the system should be well designed. The whole system of direct payments is hard to be defended anyway and it is quite clear that its current distribution is far from being fair. Capping will not help this, as Jack says, and I am pretty sure that this ‘active farmers’ vision will not help either. Who is an active farmer by definition? What do we mean by non-agricultural activity and income in tax terms? It is hard to find a common definition valid for all members in this regard. All in all what we actually see is that all of us understand what the problem is but as our hands are tied by the current set of instruments and proposals, we can hardly do anything under the current framework.

  5. Alan Matthews →
    March 14, 2012 at 15:49 #

    Attila provides a very nice summary of the opposing arguments on capping. Readers who can understand German may be interested to look at a recent policy brief
    from the IAMO institute in Halle which has undertaken some simulation modelling which supports Attila’s conclusion.

    IAMO uses its AgriPoliS model to investigate the impact of capping in the Altmark region of Sachsen-Anhalt which is a typical large-farm region in the former East Germany. AgriPoliS has the advantage of being a dynamic simulator so it can both take into account the reaction of farms to the capping (particularly through a shift to more labour-intensive forms of production such as intensive livestock in order to make more use of the labour cost deduction in the capping proposal) and also examine these reactions over time.

    The IAMO results confirm that only very few large farms will be affected – mainly arable farms with limited on-farm labour. Around 6% of farms in Altmark would be affected and they would lose a maximum of 6.9% of their direct payment.

    Capping will encourage them to shift into more intensive livestock production which, given that this is not their primary competence, will cause a loss in efficiency.

    Also structural change will be affected. Whereas in the reference scenario the affected farms would continue to grow in size, in the capping scenario they reduce in size somewhat. To the extent that economies of scale continue to exist at the typical size structure of these large farms, this would cause a further loss in efficiency.