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.

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.

Synthesis Report on the Impact of Capital Use. Factor Markets Working Document No. 57, August 2013

This paper examines the drivers of productivity in EU agriculture from a factor markets perspective. Using econometrically estimated production elasticities and shadow prices of factors for a set of eight EU member states, we focus on field crop farms represented in the FADN database for the years 2002-08. As it turned out that output reacts most elastically to materials input, we investigate this factor further and find different rationing regimes represented in different member states. Marginal return on materials is low in Denmark and West Germany, but significantly above typical market interest rates in East Germany, Italy and Spain. In the latter countries and in Denmark it also increased towards the end of the observed period. This finding is consistent with a perception of tightening funding access, possibly induced or reinforced by the unfolding financial crisis. Marginal returns to land, labour and fixed capital are generally low. We conclude that the functioning of factor markets plays a crucial role for productivity growth, but that factor market operations display considerable heterogeneity across EU member states.

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).

The Impact of CAP Payments on the Exodus of Labour from Agriculture in Selected EU Member States. Factor Markets Working Document No. 66, August 2013

This paper examines the determinants of exit from agriculture under the implementation of CAP payments in four selected EU countries (France, Hungary, Italy and Poland) in the period 2005-08. The study employs micro-data from the European Union Labour Force Survey and regional data from the Farm Accountancy Data Network. We differentiate among the different measures of farm payments, looking at the individual impact of Pillar 1 instruments, i.e. coupled and decoupled payments, and at those in Pillar 2, targeted at rural development. The main results suggest that total subsidies at the regional level are negatively associated with the out-farm migration of agricultural workers in the two New member states, Hungary and Poland, so that the CAP would seem to hinder the exit of labour from agriculture. Conversely, the non-significant results for the ‘old’ member states may be interpreted as the result of opposing effects of coupled payments and rural development support. The diverse impact of CAP on the likelihood of leaving agriculture in the four countries reflects the heterogeneity across European member states, due to different market and production structures, which does not allow a common and simple generalisation of the effect of the CAP on labour allocation.

The euro before the financial crisis of 2008: an integrating and stabilizing factor. Jean Monnet/Robert Schuman Vol. 13 No. 9, June 2013

From the Introduction. The main focus of this study is to examine whether the euro has been an economic, monetary, fiscal, and social stabilizer for the Eurozone. In order to do this, the underpinnings of the euro are analysed, and the requirements and benchmarks that have to be achieved, maintained, and respected are tested against the data found in three major statistics data sources: the European Central Bank’s Statistics Data Warehouse (http://sdw.ecb.europa.eu/), Economagic (www.economagic.com), and E-signal. The purpose of this work is to analyse if the euro was a stabilizing factor from its inception to the break of the financial crisis in summer 2008 in the European Union. To answer this question, this study analyses a number of indexes to understand the impact of the euro in three markets: (1) the foreign exchange market, (2) the stock market, and the Crude Oil and commodities markets, (3) the money market.

Do agricultural subsidies crowd out or stimulate rural credit institutions? The Case of CAP Payments. Factor Markets Working Paper No. 4, September 2011

In this paper we estimate the impact of subsidies from the EU’s common agricultural policy on farm bank loans. According to the theoretical results, if subsidies are paid at the beginning of the growing season they may reduce bank loans, whereas if they are paid at the end of the season they increase bank loans, but these results are conditional on whether farms are credit constrained and on the relative cost of internal and external financing. In the empirical analysis, we use farm-level panel data from the Farm Accountancy Data Network to test the theoretical predictions for the period 1995–2007. We employ fixed-effects and generalised method of moment models to estimate the impact of subsidies on farm loans. The results suggest that subsidies influence farm loans and the effects tend to be non-linear and indirect. The results also indicate that both coupled and decoupled subsidies stimulate long-term loans, but the long-term loans of large farms increase more than those of small farms, owing to decoupled subsidies. Furthermore, the results imply that short-term loans are affected only by decoupled subsidies, and they are altered by decoupled subsidies more for small farms than for large farms; however, when controlling for endogeneity, only the decoupled payments affect loans and the relationship is non-linear.

Institutional Factors Affecting Agricultural Land Markets. Factor Markets Working Paper No. 16, February 2012

This paper analyses the main institutional factors affecting the rental and sales markets for agricultural land. Particular attention is paid to the effects of the common agricultural policy on land markets, and more specifically the underlying mechanism through which agricultural subsidies are capitalised into land values and farmland rents. This paper also provides a broad overview of the empirical studies that estimate the impact of agricultural support policies on land rents and land prices. Various other fundamental factors that affect agricultural land markets are discussed, such as land market institutions and regulations, transaction costs, credit market constraints and levels of profitability, the legal means of contract enforcement and land use alternatives.

Supply and Demand Side Limitations Affecting the Structure of Agriculture and the Rural Economy. Factor Markets Working Paper No. 21, February 2012

The paper criticises the neo-classical assumptions of perfect factor markets and of complete information, which constitute central elements in labour market theory. Based on literature review and on economic reports from transition economies, as well as developing countries and more advanced economies, this deliverable focuses on the structural impediments and imperfections which often characterise rural labour markets and which may prevent an efficient allocation of labour. According to empirical studies, transactions costs and rigidities hinder the well-functioning of labour markets and constrain labour adjustments. The paper attempts to classify the various limitations of rural labour markets from both supply and demand side, although the distinction is not always clear-cut as some problems occur on both sides. The identification of these issues is extremely important as it allows us to highlight the inefficiencies and the failures in labour markets and to understand their impact on labour allocation. In this context, market intervention is desirable and the paper provides particular support for rural development policies such as investments in human capital. Lastly, labour institutions can play a key role in promoting the well functioning of labour markets, thus it is fundamental that they are well in place.

Defining an Institutional Framework for the Labour Market. Factor Markets Working Paper No. 24, February 2012

This paper describes a conceptual framework for the empirical analysis of farmers’ labour allocation decisions. The paper presents a brief overview of previous farm household labour allocation studies. Following this, the agricultural household model, developed by Singh, Squire and Strauss (1986), which has been frequently applied to the study of labour allocation, is described in more depth. The agricultural household model, the theoretical model to be used in this analysis, is based on the premise that farmers behave to maximise utility, which is a function of consumption and leisure. It follows that consumption is bound by a budget constraint and leisure by a time constraint. The theoretical model can then be used to explain how farmers decide to allocate their time between leisure, farm work and off-farm work within the constraints of a finite time endowment and a budget constraint. Work, both farm and off-farm, provides a return to labour which in turn relaxes the budget constraint allowing the farm household to consume more. The theoretical model can also be used to explore the impact on government policies on labour allocation. It follows that subsidies that decrease commodity prices, such as reductions in intervention prices, mean that farmers have to work more (either on or off the farm) to maintain income and consumption levels. On the other hand, income support subsidies that are not linked to output or labour, such as decoupled subsidies, are a source of non-labour income and as such allow farmers to work less while maintaining consumption levels, known as the wealth effect.

Labour Supply Curves for EU Member and Candidate States: An applied general equilibrium analysis. Factor Markets Working Paper No. 26, June 2012

This paper introduces a more sophisticated modelling of the labour market functioning of the European member and candidate states through the introduction of labour supply curves in an applied general equilibrium model. A labour supply curve offers a middle way in labour supply modelling, sitting between the two commonly adopted extremes of spare capacity and full employment. The first part of the paper outlines the theoretical foundation of the labour supply curve. Real world data is then used to derive labour supply curves for each member state, along with Croatia and Turkey. Finally, the impact of the newly specified labour markets on the results of an illustrative scenario involving reform of the common agricultural policy is explored. The results of computable general equilibrium analysis with the labour supply curve confirm the theoretical expectation that modelling the labour supply through an upwards-sloping curve produces results that lie between the extremes of spare capacity of the labour factor and fully employed labour. This specification captures a greater degree of heterogeneity in the labour markets of the member and candidate states, allowing for a more nuanced modelling of the effects of policy reform, including welfare effects.

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.

The Labour Allocation Decisions of Farm Households: Defining a theoretical model. Factor Markets Working Paper No. 31, October 2012

This paper presents a theoretical model for the analysis of decisions regarding farm household labour allocation. The agricultural household model is selected as the most appropriate theoretical framework; a model based on the assumption that households behave to maximise utility, which is a function of consumption and leisure, and is subject to time and budget constraints. The model can be used to describe the role of government subsidies in farm household labour allocation decisions; in particular the impact of decoupled subsidies on labour allocation can be examined. Decoupled subsidies are a labour-free payment and as such represent an increase in labour-free income or wealth. An increase in wealth allows farm households to work less while maintaining consumption. On the other hand, decoupled subsidies represent a decline in the return to farm labour and may lead to a substitution effect, i.e., farmers may choose to substitute non-farm work for farm work. The theoretical framework proposed in this paper allows for the examination of these two conflicting effects.

CAP Subsidies and the Productivity of EU Farms. Factor Markets Working Paper No. 37, March 2013

This paper investigates the impact of subsidies from the common agricultural policy on the total factor productivity of farms in the EU. We employ a structural, semi-parametric estimation algorithm, directly incorporating the effect of subsidies into a model of unobserved productivity. We empirically study the effects using samples from the Farm Accountancy Data Network for EU-15 countries. Our main findings are clear: subsidies had a negative impact on farm productivity in the period before the decoupling reform was implemented; after decoupling the effect of subsidies on productivity was more nuanced, as in several countries it turned positive.