Ukrainian economy overshadowed by war. OSW Commentary No. 148, 08.10.2014

Ukraine’s financial results over the past few months prove that the economic crisis which has been ongoing since mid 2012 has exacerbated. According to data from the Ukrainian Ministry of Economy, Gross Domestic Product for the first six months of 2014 shrank by 3%. In the second quarter, it fell by 4.6%1 and may further be reduced by as much as 8–10% over the year as a whole. After the first six months of this year, the balance of payments deficit reached US$4.3 billion. After deflation last year, prices grew by 12%, and the hryvnia dropped to a historic low. Although a surplus was seen in Ukrainian foreign trade in goods and services, reaching over US$3 billion at the end of June, its trade volume is shrinking. The main reason behind this deteriorating situation is the actions taken by Russia. Moscow has been fomenting the conflict in Donbas since April, has consistently imposed embargoes on imports of more and more Ukrainian goods and cut gas supplies to Ukraine in June. This has forced the government to focus on the current management of state finances and to carry out budget sequestration twice this year. The government has also used this as an excuse not to implement necessary systemic reforms. The increasing share of military expenditure, the shrinking exports (-5% in the first six months), including in particular to Russia, which until recently was Ukraine’s key trade partner, and the rapid fall in industrial production and investments have all made the situation even worse. All that saves Ukraine from an economic collapse is the loan from the International Monetary Fund and higher taxes, which allows the government to maintain budget liquidity. However, if the conflict in Donbas lasts longer and if Russia continues its economic blackmail, including withholding gas supplies, the economic crisis may prove to be long-lasting.

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.