Rental Market Regulations for Agricultural Land in EU Member States and Candidate Countries. Factor Markets Working Paper No. 15, February 2012

In this paper, we describe the regulations governing the rental markets for agricultural land in selected EU member states and candidate countries. The analysis focuses on various kinds of regulations and institutions connected with the land rental market, including price, tenancy duration, quantity and other regulations, as well as transaction costs. The diverse government regulations on price restrictions and tenancy duration are analysed, along with the social norms observed for rental payments and contracts. The paper also examines the type and registration of contracts, the contract enforcement rules, the regulations on the inheritability of contracts and the pre-emptive right of tenants to buy the land.

Factor Markets in Applied Equilibrium Models: The current state and planned extensions towards an improved presentation of factor markets in agriculture. Factor Markets Working Paper No. 23, February 2012

This paper describes how factor markets are presented in applied equilibrium models and how we plan to improve and to extend the presentation of factor markets in two specific models: MAGNET and ESIM. We do not argue that partial equilibrium models should become more ‘general’ in the sense of integrating all factor markets, but that the shift of agricultural income policies to decoupled payments linked to land in the EU necessitates the inclusion of land markets in policy-relevant modelling tools. To this end, this paper outlines options to integrate land markets in partial equilibrium models. A special feature of general equilibrium models is the inclusion of fully integrated factor markets in the system of equations to describe the functionality of a single country or a group of countries. Thus, this paper focuses on the implementation and improved representation of agricultural factor markets (land, labour and capital) in computable general equilibrium (CGE) models. This paper outlines the presentation of factor markets with an overview of currently applied CGE models and describes selected options to improve and extend the current factor market modelling in the MAGNET model, which also uses the results and empirical findings of our partners in this FP project.

Simulation of Land Use and Investment Behaviour under Different Policy Scenarios: Results of the extended farm/household model. Factor Markets Working Paper No. 27, July 2012

Factor markets are a central issue in analyses of farm development and of agricultural sector vitality. Among the different production factors, land is one of the most studied. Several studies seek to estimate the effect of government policy payments on land value or land rental prices. The studies mostly agree that government payments and other types of policy support are significant in explaining land prices and account for a large share of them. In October 2011, the European Commission published a new policy proposal for the common agricultural policy (CAP) up to 2020. The proposed regulation includes a shift from historical to regional payments. The objective of this paper is to provide an ex ante analysis of the impact of the new CAP policy instruments on the land market. In particular, the effect of the regionalisation of payments in Italy is examined. The analysis is based on the use of a mathematical programming model to simulate the changes in land demand for a farm in Emilia Romagna. The results highlight the relevance of the new policy mechanism in determining a change in land demand. Yet the effect is highly dependent on initial ownership of entitlements under the historical payment scheme.

Does the Common Agricultural Policy Reduce Farm Labour Migration? Panel data analysis across EU regions. Factor Markets Working Paper No. 28, July 2012

This paper deals with the determinants of labour out-migration from agriculture across 149 EU regions over the 1990–2008 period. The central aim is to shed light on the role played by payments from the common agricultural policy (CAP) on this important adjustment process. Using static and dynamic panel data estimators, we show that standard neoclassical drivers, like relative income and the relative labour share, represent significant determinants of the intersectoral migration of agricultural labour. Overall, CAP payments contributed significantly to job creation in agriculture, although the magnitude of the economic effect was rather moderate. We also find that pillar I subsidies exerted an effect approximately two times greater than that of pillar II payments.

Influence of the Common Agricultural Policy and Heterogeneous Land Quality on Land Rent and Land Allocation. Factor Markets Working Paper No. 38, March 2013

Against the background of the current discussion about the EU’s common agricultural policy (CAP) after 2013, the question of the impact of government support on land prices is crucially important. Validation of the CAP’s success also hinges on a proper assessment of a choice of policy instruments. This study therefore has the objective of investigating on a theoretical basis the effects of different government support measures on land rental prices and land allocation. The different measures under consideration are the price support, area payments and decoupled single farm payments (SFPs) of the CAP. Our approach evaluates the potential impact of each measure based on a Ricardian land rent model with heterogeneous land quality and multiple land uses. We start with a simple model of one output and two inputs, where a Cobb-Douglas production technology is assumed between the two factors of land and non-land inputs. In a second step, an outside option is introduced. This outside option, as opposed to land use of the Ricardian type, is independent of land quality. The results show that area payments and SFPs become fully capitalised into land rents, whereas in a price support scheme the capitalisation depends on per-acreage productivity. Moreover, in a price support scheme and a historical model, the capitalisation is positively influenced by land quality. Both area payments and price supports influence land allocation across different uses compared with no subsidies, where the shift tends to be larger in an area payment scheme than in a price support scheme. By contrast, SFPs do not influence land allocation.

Investment behaviour of EU arable crop farms in selected EU countries and the impact of policy reforms. Factor Markets Working Document No. 42, May 2013

This deliverable provides a comparative analysis, among selected EU member states, of the investment demand of a sample of specialised field crop farms for farm buildings, machinery and equipment as determined by different types and levels of Common Agricultural Policy support. It allows for the existence of uncertainty in the price of output farmers receive and for both long- and short-run determinants of investment levels, as well as for the presence of irregularities in the cost adjustment function due to the existence of threshold-type behaviours. The empirical estimation reveals that three investment regimes are consistently identified in Germany and Hungary, across asset and support types, and in France for machinery and equipment. More traditional disinvestment-investment type behaviours characterise investment in farm building in France and the UK, across support types, and Italy for both asset classes under coupled payments. The long-run dynamic adjustment of capital stocks is consistently and significantly estimated to be towards a – mostly non-stationary – lower level of capitalisation of the farm analysed. By contrast, the expected largely positive short-run effects of an increase in output prices are often not significant. The effect of CAP support on both types of investment is positive, although seldom significant, while the proxy for uncertainty employed fails to be significant yet, in most cases, has the expected effect of reducing the investment levels.

A Spatial Analysis of Agricultural Land Prices in Bavaria. Factor Markets Working Document No. 50, June 2013

This paper empirically analyses a dataset of more than 7,300 agricultural land sales transactions from 2001 and 2007 to identify the factors influencing agricultural land prices in Bavaria. We use a general spatial model, which combines a spatial lag and a spatial error model, and in addition account for endogeneity introduced by the spatially lagged dependent variable as well as other explanatory variables. Our findings confirm the strong influence of agricultural factors such as land productivity, of variables describing the regional land market structure, and of non-agricultural factors such as urban pressure on agricultural land prices. Moreover, the involvement of public authorities as a seller or buyer increases sales prices in Bavaria. We find a significant capitalisation of government support payments into agricultural land, where a decrease of direct payments by 1% would decrease land prices in 2007 and 2001 by 0.27% and 0.06%, respectively. In addition, we confirm strong spatial relationships in our dataset. Neglecting this leads to biased estimates, especially if aggregated data is used. We find that the price of a specific plot increases by 0.24% when sales prices in surrounding areas increase by 1%.

Influence of Agricultural Support on Sale Prices of French Farmland: A comparison of different subsidies, accounting for the role of environmental and land regulations. Factor Markets Working Document No. 51, June 2013

This paper investigates the determinants of agricultural land price in several regions in France over the period 1994-2011, using individual plot transaction data, with a particular emphasis on agricultural subsidies and nitrate zoning regulations. It found a positive but relatively small capitalisation effect of the total subsidies per hectare. The data revealed that agricultural subsidies capitalised, at least to some extent, but the magnitude of such a capitalisation depends on the region considered, on the type of subsidy considered, and on the location of the plot in a nitrate surplus zone or not. Only land set-aside premiums significantly capitalise into land price, while single farm payments have a significant positive capitalisation impact only for plots located in a nitrate-surplus zone.

Farm/Household-Level Simulation: Results of Testing Policy and Other Scenarios. Factor Markets Working Document No. 54, June 2013

Among the different production factors, land is the one that most often limits farm development and one of the most studied. The connection between policy and other context variables and land markets is at the core of the policy debate, including the present reform of the Common Agricultural Policy. The proposal of the latter has been published in October 2011 and in Italy it will include the switch of the payment regime from an historical to a regional basis. The authors’ objective is to simulate the impact of the proposed policy reform on the land market, particularly on land values and propensity to transaction. They combine insights and data from a farm household investment model revised and extended in order to simulate the demand curve for land in different policy scenarios and a survey of farmers stated intention carried out in the province of Bologna (Italy) in 2012. Based on these results, the authors calibrate a mathematical programming model of land market exchanges for the province of Bologna and use this model form simulation. The results of the model largely corroborate the results from the survey and both hint at a relevant reaction of the land demand and supply to the shift from the historical to the regionalised payments. As effect, the regionalisation would result in increased rental prices and in a tendency to the re-allocation of land.

Simulation Results on the Impact of Changes in the Main EU Policy Tools on Farm Investment Behaviour. Factor Markets Working Document No. 56, June 2013

This paper completes the comparative analysis of the investment demand behaviour, of a sample of specialised arable crop farms, for farm buildings and machinery and equipment, as a function of the different types and levels of Common Agricultural Policy support, in selected European Union Member States. This contribution focuses on their quantitative interdependence calculating the relevant elasticity measures. In turn, they constitute the methodological tool to simulate the percentage expected change in average net investment levels associated to the implementation of the, recently proposed and currently under discussion, reductions in the Pillar I Direct Payments disbursed under the Common Agricultural Policy. Evidence suggests a statistically significant elastic and inelastic relationship between both types of subsidies and the investment levels for both asset classes in Germany and Italy, respectively. An elastic dependence of investment in farm buildings on decoupled subsidies exists in Hungary while changes in the level of coupled payments appear to translate into less than proportional changes in the demand for both farm buildings and machinery and equipment in France. Coupled payments appear to influence the UK demand for both asset classes in an elastic manner while decoupled support seems to induce a similar effect on investment in machinery and equipment. Since the currently discussed Common Agricultural Policy reform options imply, almost exclusively, a reduction in the level of support granted through Direct Payments, simulated effects were expected to reveal a worsening of the farm investment prospects for both asset types (i.e., a larger negative investment or a smaller positive one). The actual evidence largely respects this expectation with the sole exception of investment in machinery and equipment in France and Italy reaching smaller negative or larger positive levels irrespectively of the magnitude of the implemented cuts in Direct Payments.

Interconnector Investment for a Well-Functioning Internal Market: What EU regime of regulatory incentives? Bruges European Economic Research (BEER) Papers 18/October 2010

Sufficient cross‐border electricity transmission infrastructure is a pre‐requisite for a functioning European internal market for electricity. Also, the achievement of the EU’s energy policy objectives – sustainability, competitiveness and security of supply – critically depends on adequate investment in physical interconnections between the member states. Mainly focusing on the “regulatory path”, this paper assesses different ways to achieve a sufficient level of interconnector investment. In a first step, economic analysis identifies numerous impediments to interconnector investment adding up to an “interconnector investment failure”. Reflecting on the proper regulatory design of an EU framework able to overcome the interconnector investment failure, a number of recommendations are put forward:  All congestion rents should be channeled into interconnector building. Unused rents should be transferred to a European interconnector fund supervised by an EU agency.  Even though inherently sub‐optimal, merchant transmission investment can be used as a means to put pressure on regulated transmission system operators (TSO) that do not deliver. An EU agency should have exclusive competence on merchant interconnector exemptions.  A European TSO organization should be entrusted with supra‐national network planning, supervised by an EU agency.  The agency should decide on investment cost reallocation for interconnector projects that yield strong externalities. Payments could be settled via a European interconnector fund.  In case of non‐compliance with the supra‐national network plan, the EU agency should have the right to organize a tender – financed by the European interconnector fund – in order to get the “missing link” built. Assessing the existing EU regulatory framework, the efforts of the 2009 “third energy package” to fill the “regulatory gap” with new EU bodies – ACER and ENTSO‐E – are acknowledged. However, striking holes in regulatory framework are spotted, notably with regard to the use of congestion rents, interconnector cost allocation, and the distribution of decision making powers on new infrastructure exemptions A discussion of the TEN‐E interconnector funding scheme shows that massive funding can be an interim solution to the problem of insufficient interconnection capacities while overcoming the political deadlock on sensible regulatory topics such as interconnector cost allocation. The paper ends with policy recommendations.

Determinants of Farm Labour Use: A Comparison between Ireland and Italy. Factor Markets Working Documents No. 60, August 2013

This paper examines the effect of the decoupling of farm direct payments upon the off-farm labour supply decisions of farmers in both Ireland and Italy, using panel data from the Farm Business Survey (REA) and FADN database covering the period from 2002 to 2009 to model these decisions. Drawing from the conceptual agricultural household model, the authors hypothesise that the decoupling of direct payments led to an increase in off-farm labour activity despite some competing factors. This hypothesis rests largely upon the argument that the effects of changes in relative wages have dominated other factors. At a micro level, the decoupling-induced decline in the farm wage relative to the non-farm wage ought to have provoked a greater incentive for off-farm labour supply. The main known competing argument is that decoupling introduced a new source of non-labour income i.e. a wealth effect. This may in turn have suppressed or eliminated the likelihood of increased off-farm labour supply for some farmers. For the purposes of comparative analysis, the Italian model utilises the data from the REA database instead of the FADN as the latter has a less than satisfactory coverage of labour issues. Both models are developed at a national level. The paper draws from the literature on female labour supply and uses a sample selection corrected ordinary least squares model to examine both the decisions of off-farm work participation and the decisions regarding the amount of time spent working off-farm. The preliminary results indicate that decoupling has not had a significant impact on off-farm labour supply in the case of Ireland but there appears to be a significantly negative relationship in the Italian case. It still remains the case in both countries that the wealth of the farmer is negatively correlated with the likelihood of off-farm employment.

Off-farm Labour Decision of Italian Farm Operators. Factor Markets Working Document No. 61, August 2013

This paper analyses the factors affecting off-farm labour decisions of Italian farm operators. Using micro-level data from the Farm Business Survey (REA) over the pre- and post-2003 CAP reform periods, we investigated the impact that operator, family, farm and market characteristics exert on these choices. Among other things, the paper focuses also on the differential impact of those variables for operators of smaller and larger holdings. The main results suggest that operator and family characteristics have a significant impact on the decision to participate in off-farm work more for smaller than for bigger farms. By contrast, farm characteristics are more relevant variables for bigger farms. In particular, decoupled farm payments, by increasing the marginal productivity of farm labour, lower the probability of working off the farm only in bigger farms, while coupled subsidies in pre-reform years do not have a significant impact on labour decisions. Finally, we show that, after accounting for the standard covariates, local and territorial labour market characteristics generally have a low effect on off-farm work operators’ choices.

The Impact of CAP Reforms on Farm Labour Structure. Factor Markets Working Document No. 63, August 2013

The labour force engaged in the agricultural sector is declining over time, and one can observe the reallocation of labour from family members to hired workers. Using farm-level data, this paper analyses the on-farm labour structure in Greece and assesses the factors driving its evolution over the period 1990-2008. The impact of agricultural policies and farm characteristics is examined in a dynamic panel analysis. Family and hired labour are found to be substitutes rather than complements, while agricultural support measures appear to negatively affect demand for both family and hired labour. Decoupled payments and subsidies on crops are found to have a significant impact on both sources of labour, as well as subsidies for rural development that do not favour on-farm labour use. The paper also finds that structural labour adjustments are the result of farm characteristics, such as farm size and location. The results are robust to various estimation techniques and specifications.

The Impact of the SFP System on Italian Farmland Prices and Tenure Contracts. Factor Markets Working Document No. 65, August 2013

EDITED VERSION TO BE PUBLISHED SOON. The aim of this paper is to contribute to the estimation of the potential effects of the CAP reform on propensity to transaction, particularly comparing the effect of different new instruments/policy settings with the current policy (CAP health check) used as a baseline. The work is focused on three of new policy instruments within the post 2013 CAP reform proposal: regionalization, greening and capping. The first and second are analysed in more detail. The analysis will be based on a survey of farmers in the Province of Bologna, Emilia Romagna, Italy. The questionnaire focuses on mechanism of access to land and related incentives towards different land use/economic behaviour. The survey includes information about respondent characteristics (farm, farmer, household and payments received) and stated intention about potential changes in land operated under alternative agricultural policy scenarios (particularly the post-2013 reform proposals).