Viability of corporate farms in the New Member States under the Common Agricultural Policy system: a game theory approach focusing on rented land

This paper aims to investigate whether distributional issues within corporate farms in the New Member States (NMS) will be exacerbated by the introduction of the Common Agricultural Policy (CAP) direct payments. The payments are allocated on a per hectare basis under the Single Area Payment Scheme (SAPS), without an obligation to produce at all but providing that the land is kept in good agricultural and environmental conditions. In this context one major challenge faced by the farming sectors in the NMS relates to the viability of their corporate farms, which consist of various stakeholders. As the CAP direct payments will be allocated to farm holdings, they might exacerbate the distributional conflicts among these stakeholders regarding the way profit (including direct payments) is distributed between investment, dividends, rentals and wages. If the stakeholders are not satisfied with the manager’s decision to use the payments, they have the option to exit the corporate farm, which may lead to its disappearance. The conflicts between managers and landowners are crucial, as corporate farms rent most of their utilised agricultural area from individual landowners. Before the accession to the EU the landowners did not have strong incentives to withdraw their land, as the other available opportunities were not associated with higher returns on land ownership. However, this situation might change as landowners can cash the direct payments themselves, providing they keep their land in good condition. The paper focuses on the specific impact of the direct payments on the rent negotiations between corporate farms and private landowners. Game theory is used to model the negotiations between a corporate farm’s manager and a representative landowner. The model suggests that the CAP direct payments might induce more rent renegotiations, and that the latter will be successful and thus not followed by withdrawals. Results from a survey of 381 landowners in Slovakia and the Czech Republic corroborate these findings. They indicate a potential change in landowners’ behaviour induced by the introduction of the CAP direct payments, namely that more landowners intend to renegotiate their rent level in the next five years. All this leads to the conclusion that the CAP support will not result in the quick disappearance of corporate farms.