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Decoupling of direct payments

This lecture provides an economic analysis of decoupling direct payments in agriculture and reviews studies on the impact of the MTR in the EU and Ireland. It discusses the conceptual, theoretical, empirical, and regulatory dimensions of decoupling and explores its effects on production, trade, farm incomes, and agricultural greenhouse gas emissions.

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Decoupling of direct payments

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  1. Decoupling of direct payments Lecture 9. Economics of Food Markets Alan Matthews

  2. Lecture outline • To provide an economic analysis of decoupling of direct payments • To review studies on the impact of the MTR both in the EU and Ireland

  3. Impacts of decoupling • Many studies • Teagasc FAPRI-Ireland • OECD • Commission Impact studies • FAPRI-US • Dixon/Matthews (forthcoming) • We look at some results from the Dixon/Matthews study

  4. Decoupled payments – conceptual overview • OECD dimensions (OECD, 2001) • Theoretical dimension – how do agricultural policies, including direct payments, potentially affect production and trade • Empirical dimension – what do we know about the actual production and trade impacts of different types of agricultural policies, including decoupled payments • Regulatory dimension - ‘best practice’ in the design of the most decoupled policies or policy practices, not least to be WTO compatible.

  5. Decoupling - definitions • Full decoupling • policy is fully decoupled if it does not influence production decisions of farmers and if it permits free determination of market prices • Importantly, both the shape and the position of the supply and demand curves should not be changed • Effective full decoupling • Where policy results in a level of production and trade equal to that which would have occurred if the policy were not in place • Example would be a coupled payment combined with a quantitative restriction equal to the old production level

  6. Although new policy (represented by S’) yields the same level of output initially, adjustment to a demand shock leads to a different output level than before Example of how the definitions differ

  7. The degree of decoupling • Comparing the degree of decoupling requires a reference, usually taken as the output effect of market price support • From producer perspective, defined as 1 minus the ratio of the production effect of the policy package over the production effect of the equivalent (in PSE terms) price increase

  8. Can decoupled payments affect production? Source: Baldwin June 2003 CAP Reform

  9. Decoupled payments in an uncertain world • Where farmers are risk averse • Wealth effects: Change in farmer’s total wealth can affect his attitude to risk • Insurance effects: If policy reduces the total risk faced by the farmer (e.g. price stabilisation scheme) it will have positive effect on output

  10. Decoupling in a dynamic world • Where there are capital market imperfections, any kind of income support – even decoupled – will be partially reinvested in agriculture • Where there are expectations of a future policy change and farmer can hope to influence this (e.g. change in base acreage for a payments scheme) decoupled scheme can affect production.

  11. Decoupling: the effects • Output effects • By how much will output fall • Environmental benefits arise through more extensive production… • …but danger of land abandonment in marginal farming areas • Long term sustainability?

  12. Source: OECD 2005 Decoupling – Policy Implications

  13. Change in volume of output as result of MTR Source: Dixon and Matthews, forthcoming

  14. Farm Incomes

  15. Change in agricultural greenhouse gas emissions (CO2 equivalent)

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