The Common Agricultural Policy (CAP), representing the second largest share of the EU budget, is an evolving policy area. In the two last decades, support to farmers evolved from price support towards direct payment decoupled from production.
Further reforms responding to internal and external challenges will be necessary, in particular in the context of the assessment of the multiannual financial framework 2014-2020, against the backdrop of an uncertain macro-economic environment. Continued impact analysis of different policy options is necessary to feed the political debate.
The JRC develops economic modelling tools to answer such requirement for ex-ante impact assessment of new CAP policy options, at aggregate level (impact of policy options on EU markets and income) and at farm level, both concerning the direct impact of policies on farms (income and subsidies distribution, production costs, agricultural structures) and on farmers' behaviours (e.g. investment strategies).
Agricultural Policy Analysis
The Common Agricultural Policy needs to be adapted to the evolution of its wider context. Different policy options imply different impacts on production and markets, which need to be assessed in due time.
The Common Agricultural Policy has been thoroughly reformed in the two last decades and, became, from its initial price support focus, a modernised policy based on direct payments per hectare to farmers, decoupled from production, more market-oriented than in the past. Reforms are due to continue to address current and future budgetary, economic, environmental and territorial challenges.
Direct payments to farmers should better reflect the public service that farmers provide (e.g. efforts to protect the environment), help support farming even in the most disadvantaged areas and be more fairly distributed throughout the EU and between active farmers.
The JRC developed economic modelling tools, both global CGE models assessing the economy-wide impacts and global partial equilibrium models simulating only the impacts incurred by the agricultural sector, into an integrated modelling platform.
This wide range of different models is used to simulate the impacts of different policy options, for example concerning the phasing out of quotas dairy, sugar), the introduction of greening provisions in the Single Payment Scheme, and options for the redistribution of payments.
EU Farm Economic Analysis
Farmers in the EU are directly affected by the Common Agricultural Policy (CAP). Given the large variety of farmer types in the EU, assessing CAP impact is complex and depends on the different structures in the different regions of the EU.
Within the EU, the diversity of farm types is important, in terms of size from very large to typical family farms or semi-subsistence and subsistence micro-farms, of on-farm diversification or specialisation or off-farm sources of income. In addition, throughout Europe, there is a rapid structural decreasing trend of number of farms and active farmers. In this context, policy instruments, in particular the Common Agricultural Policy (CAP) might result in very different impacts at farm level depending on the type of farms affected.
The JRC studies several aspects of the impact of policies on farms:
- the distribution of subsidies and income between farmers and other stakeholders (such as landowners),
- the impact on farm structural change in the sense of the change in production systems and farm entry/exit into one sector/farm typology, and its drivers (e.g., demographics, off-farm employment, economic environment), on the base of extensive data (Eurostat's farm structure survey and DG agriculture and Rural development accountancy database FADN),
- the impacts of various policy options on farm production costs.
Impact on farm household behaviour
The Common Agricultural Policy might have an impact on the behaviour of farmers, beyond the direct impact and short term impact on markets, in particular through the investment propensity, particularly important with respect to more efficient and greener technologies and production processes.
Farm investment is an important policy issue because the current farm production is a function of several inputs, including the current level of capital, which depends on past investment decisions. Annual investment decisions affect both current and future production. Thus, any policy that increases investment will influence farm output for some years into the future.
The future results of the Common Agricultural Policy (CAP) reform process will be largely determined by changes in farmers' investment behaviour, likely to be influenced through both farm income support (increasing the self-financing possibility and access to credit) and rural development programmes allowing the reduction of investment costs. Through surveys to farmers, the JRC has been examining during the last decade the impact of policy and non-policy variables on realized and future farm investments.