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Assessing potential coupling factors of European decoupled payments with the Modular Agricultural GeNeral Equilibrium Tool (MAGNET)

In 2020, decoupled payments will represent about 42% of the CAP budget (green payments excluded). This report assesses the potential effects of European decoupled payments on farmers' production decisions, prior to a sensitivity analysis of different coupling factors using the Modular Applied GeNeral Equilibrium Tool (MAGNET). Scientific literature reveals different coupling channels such as capitalisation in land value, farmers' risk behaviour, credit accessibility, uncertainty about future policies and labour allocation through which European decoupled payments influence farm choices and thus output. For each of these channels the relevant literature introducing theoretical and empirical assessments is evaluated with the aim of deriving plausible behavioural parameters that improve the representation of decoupled payments in economic simulation models. To capture completely decoupled production behaviour, many CGE models typically represent decoupled payments as a uniform subsidy rate to the land using (agricultural) sectors. Nevertheless based on a thorough review of the literature, it appears that a more suitable modelling approach which caters for heterogeneous member state land markets, may be to split the allocation of decoupled payments. On the one hand, a proportion is committed to land as a function of the capitalisation rate into the rental value, whilst a second tranche is distributed uniformly across all factors, reflecting a balance of different coupling channels. A sensitivity analysis concludes that if one assumes differing degrees of coupling, it does have some implication for output and price results when conducting policy analysis.