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.

The Valuation of Agricultural Land and the Influence of Government Payments. Factor Markets Working Paper No. 10, December 2011

This study gives an overview of the theoretical foundations, empirical procedures and derived results of the literature identifying determinants of land prices. Special attention is given to the effects of different government support policies on land prices. Since almost all empirical studies on the determination of land prices refer either to the net present value method or the hedonic pricing approach as a theoretical basis, a short review of these models is provided. While the two approaches have different theoretical bases, their empirical implementation converges. Empirical studies use a broad range of variables to explain land values and we systematise those into six categories. In order to investigate the influence of different measures of government support on land prices, a meta-regression analysis is carried out. Our results reveal a significantly higher rate of capitalisation for decoupled direct payments and a significantly lower rate of capitalisation for agri-environmental payments, as compared to the rest of government support. Furthermore, the results show that taking theoretically consistent land rents (returns to land) and including non-agricultural variables like urban pressure in the regression implies lower elasticities of capitalisation. In addition, we find a significant influence of the land type, the data type and estimation techniques on the capitalisation rate.

Income Distributional Effects of Decoupled Payments Single Payment Scheme in the European Union. Factor Markets Working Paper No. 29, July 2012

This paper analyses the effects of the Single Payment Scheme (SPS) with and without farm structural change, and focuses on how income distributional effects and farm restructuring are impacted by the SPS under: alternative entitlement tradability, cross-compliance and CAP 'greening' requirements, different SPS implementation models, the entitlement stock, market imperfections and institutional regulations. The authors find that the SPS implication details are highly significant, since farmers’ benefits can range from 100% of the SPS value to a negative policy incidence, and farm structural change may also be hindered by the SPS.

Direct Payments and Land Rents: Evidence from New Member States. Factor Markets Working Document No. 62, August 2013

This Factor Markets Working Paper analyses the impact of increasing direct payments on land rents in six new EU member states in which agricultural subsidies largely increased as a result of their EU accession. The authors find that up to 25 eurocents per additional euro of direct payments is capitalised in land rents. In addition, the results show that capitalisation of direct payments is higher in more credit constrained markets, while capitalisation of direct payments is lower in countries where more land is used by corporate farms.

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.

An Analysis of the Capitalisation of CAP Payments into Land Rental Rates in Ireland. Factor Markets Working Document No. 68, August 2013

EDITED VERSION SOON TO BE PUBLISHED In this paper the effect of decoupling on the capitalisation of agricultural subsidies into agricultural rents in Ireland are analysed using a dynamic rental equations estimated with a two step system GMM estimator that accounts for expectation error and endogenous regressors. The findings illustrate the importance of institutional details in determining the extent to which subsidies are capitalised. In the period prior to decoupling Pillar 1 subsidies were highly capitalised into Irish agricultural rents in both the short and the long run. Depending on the farm system considered between 58 to 80 cents per euro of subsidies were capitalised into agricultural rents. In the post decoupling period the rate at which Pillar 1 subsidies are capitalised into Irish agricultural rents is found to have declined. This change is likely due to short term character of the Irish agricultural land rental market, where 11 month rental periods predominate, and the freedom that the 2003 reform of the CAP offered farmers to consolidate entitlements established on rented land. The generally very short term nature of Irish agricultural rental contracts offered farmers an opportunity to consolidate entitlements that is unlikely to have arisen in other Member States with agricultural land rental markets characterised by long term contracts. The results in both the pre and post decoupling periods highlight the high degree of inertia of agricultural rents in Ireland, and the importance of accounting for dynamics when investigating the capitalisation of agricultural subsidies into land rents. The high degree of inertia in rents means that the impact of previously capitalised agricultural policy persists through time.