Farm level policy scenario analysis

This study presents a quantitative policy impact analysis of alternative policy and macroeconomic assumptions in the agricultural farming sector. Three scenarios are considered: direct payment scenario, macroeconomic environment scenario and WTO scenario. We apply the CAPRI-Farm model, an extension of CAPRI which disaggregates the standard Nuts2 regional resolution of the supply models in CAPRI further to farm type models, capturing farm heterogeneity in terms of farm specialization and farm size across all EU regions and MS. The advantage of the CAPRI-Farm model compared to other similar models is that it represents comprehensively all major farm types in the EU and it links farm level behaviour with output and input market price responses. The direct payment scenario assumes equalisation of decoupled payments - a regional flat-rate scheme - at the Nuts1, MS and EU levels. According to simulation results, the value of re-distributed payments vary strongly between the three flat-rate systems. The value of payments reallocated between farms in the EU increases from 9% (3.7 billion Eur) of the total CAP budget in the Nuts1 scenario to 19% (8.2 billion Eur) in the EU flat-rate scenario. Particularly negatively affected are large- and medium-sized farms and dairies, mixed crops and livestock, general field and mixed cropping, olives, cereals and oilseeds and permanent crops. Small farms tend to be less affected. However, sheep, goats and grazing, the residual farm category and mixed livestock farms realise higher premiums and incomes. The study shows relatively minor allocative market responses and thus small price effects for all three scenarios. The WTO scenario aims to quantify the impact of trade liberalization on farming sector. More precisely, the scenario considers the impact of the proposal made by the chair of the WTO's agriculture negotiations, Ambassador Crawford Falconer. The simulation results show that tariff reduction increases consumer welfare in the EU by 8.5 billion Eur, whereas agricultural income decreases by 6.8 billion Eur (-3%), mainly driven by losses realised in the animal sector. The analyses show sizable impacts on farm income for different farm types. Generally, farm types specialised in livestock production lose the most. The largest negative income effects were observed for cattle, dairying, rearing and fattening, dairy, mixed crops and livestock; and sheep and goat farms. The macroeconomic environment scenario simulates the farm-level effects of a hypothetical economic recovery scenario that may lead to higher GDP growth and higher oil prices. Two shocks are assumed: an increase in the crude oil price by 50% and an annual world GDP growth rate increase by 1% relative to the baseline level. The results indicate that a higher GDP growth causes stronger price and market effects than does the increase in the oil price. With the oil price shock, farmers are affected by two opposing effects: an increase in production costs and an increase in revenues. In most cases, increasing costs dominate such that the overall farm income declines. The effect of higher GDP on income across farm types is generally positive due to the rising demand for agricultural products, which generates an increase in the prices of agricultural commodities. Farmers react to the new macro environment with adjustments of their production leading to an increase in arable land and intensification of crop and animal production activities. Further, a tendency to substitute grassland for arable land can be observed.

JRC.DDG.J.5 - Agriculture and Life Sciences in the Economy